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Present bias, risk management and capital structure

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  • Pape, Jan

Abstract

Standard credit risk models assume entrepreneurs maximize long-term equity value, despite significant evidence that entrepreneurs overvalue short-term profits and undervalue future long-term returns. We extend a classical credit risk framework by entrepreneurial myopia and show that myopic entrepreneurs favour lower volatility, while defaulting at a higher cash flow level. Our analysis distinguishes between sophisticated and naive entrepreneurs and shows that naivety leads to lower cash flow volatility and delayed default.

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  • Pape, Jan, 2025. "Present bias, risk management and capital structure," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    • Handle: RePEc:eee:jeborg:v:236:y:2025:i:c:s0167268125002136
    DOI: 10.1016/j.jebo.2025.107094
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