Investment and capital structure decisions under time-inconsistent preferences
Based on a continuous-time model of quasi-hyperbolic discounting, this paper provides an analytically tractable framework of entrepreneurial firms’ investment and capital structure decisions with time-inconsistent preferences. We show that the impact of time-inconsistent preferences depends not only on the financing structures (all-equity financing or debt-equity financing), but also on the entrepreneurs’ belief regarding their future timeinconsistent behavior (sophisticated or naive). Time-inconsistent preferences delay investment under both all-equity financing and debt-equity financing. However, the impact is weakened under debt-equity financing, because debt financing increases the payoff value upon investment and accelerates investment. Naive entrepreneurs invest later and default earlier than sophisticated entrepreneurs, leading to a shorter operating period. Moreover, we find that naive entrepreneurs may choose higher leverage, while sophisticated entrepreneurs always choose lower leverage, compared to the time-consistent benchmark. These results support the empirical findings in entrepreneurial finance.
|Date of creation:||Apr 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.kier.kyoto-u.ac.jp/eng/index.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jamison Dean T. & Jamison Julian, 2011. "Characterizing the Amount and Speed of Discounting Procedures," Journal of Benefit-Cost Analysis, De Gruyter, vol. 2(2), pages 1-56, April.
- Ted O'Donoghue and Matthew Rabin ., 1997.
"Doing It Now or Later,"
Economics Working Papers
97-253, University of California at Berkeley.
- O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
- Steven R. Grenadier & Neng Wang, 2006.
"Investment Under Uncertainty and Time-Inconsistent Preferences,"
NBER Working Papers
12042, National Bureau of Economic Research, Inc.
- Grenadier, Steven R. & Wang, Neng, 2007. "Investment under uncertainty and time-inconsistent preferences," Journal of Financial Economics, Elsevier, vol. 84(1), pages 2-39, April.
- Grenadier, Steven R. & Wang, Neng, 2005. "Investment under Uncertainty and Time-Inconsistent Preferences," Research Papers 1899, Stanford University, Graduate School of Business.
- Hayne E. Leland., 1994.
"Corporate Debt Value, Bond Covenants, and Optimal Capital Structure,"
Research Program in Finance Working Papers
RPF-233, University of California at Berkeley.
- Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September.
- Isabelle Brocas & Juan D. Carrillo, 2004. "Entrepreneurial Boldness and Excessive Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 321-350, 06.
- Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
- Laibson, David, 1997.
"Golden Eggs and Hyperbolic Discounting,"
The Quarterly Journal of Economics,
MIT Press, vol. 112(2), pages 443-77, May.
- Hackbarth, Dirk, 2008. "Managerial Traits and Capital Structure Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(04), pages 843-881, December.
- Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
- Dirk Hackbarth & David C. Mauer, 2012. "Optimal Priority Structure, Capital Structure, and Investment," Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 747-796.
- Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
- Hackbarth, Dirk, 2009. "Determinants of corporate borrowing: A behavioral perspective," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 389-411, September.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
When requesting a correction, please mention this item's handle: RePEc:kyo:wpaper:858. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ryo Okui)
If references are entirely missing, you can add them using this form.