Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans

Adam, Tim R.; Burg, Valentin; Scheinert, Tobias and Streitz, Daniel (23. July 2014): Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans. SFB/TR 15 Discussion Paper No. 475

Abstract

We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater performance-pricing sensitivity than rational managers. Consistent with their biased expectations, firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans.

• Item Type: Paper
• Keywords: Optimism Bias, Performance-Sensitive Debt, Debt Contracting, Syndicated Loans
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B8 - Reputation in der Zertifizierungsindustrie
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G02, G30, G31, G32
• Language: German