Managerial Optimism and Debt Covenants

• 成果类型: Article
• 署名作者: Infuehr, Jakob; Laux, Volker
• 署名单位: University of Southern Denmark; University of Texas System; University of Texas Austin
• 刊物名称: JOURNAL OF ACCOUNTING RESEARCH
• ISSN/ISSBN: 0021-8456
• DOI: 10.1111/1475-679X.12402
• 发表日期: 2022
• 页码: 353-371
• 关键词: ceo overconfidence; empirical-analysis; INVESTMENT; entrepreneurs; PERSPECTIVE; CONTRACTS; illusion; returns; sample; biases

摘要

This paper studies the effects of managerial optimism on the optimal design of debt covenants. We find that managers who are more optimistic about the future success of their investment ideas provide lenders with greater control rights via tighter covenants. This is optimal for optimistic managers even though they understand that tighter covenants increase the probability of covenant violations and lead to excessive lender intervention. The broad reason for this result is that optimists wish to write contracts that repay lenders more frequently in bad states rather than in good states, and the only way to achieve this is by granting lenders more control rights. Our model generates new predictions and offers a novel explanation for the empirical evidence that covenants in debt contracts are set very tightly and are often violated.