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

Listed author(s):
  • Adam, Tim R.
  • Burg, Valentin
  • Scheinert, Tobias
  • Streitz, Daniel

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.

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File URL: https://epub.ub.uni-muenchen.de/21419/1/475.pdf
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Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 475.

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Date of creation: 23 Jul 2014
Handle: RePEc:trf:wpaper:475
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