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

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  • Adam, Tim R.
  • Burg, Valentin
  • Scheinert, Tobias
  • Streitz, Daniel

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.

Suggested Citation

  • Adam, Tim R. & Burg, Valentin & Scheinert, Tobias & Streitz, Daniel, 2014. "Managerial Optimism and Debt Contract Design: The Case of Syndicated Loans," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 475, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:475
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    References listed on IDEAS

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    Cited by:

    1. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
    2. Berg, Tobias & Saunders, Anthony & Steffen, Sascha, 2015. "The Total Costs of Corporate Borrowing in the Loan Market: Don’t Ignore the Fees," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 489, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    Optimism Bias; Performance-Sensitive Debt; Debt Contracting; Syndicated Loans;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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