Investment and capital structure decisions under time-inconsistent preferences　

Masaaki Kijima () and Yuan Tian ()
Additional contact information
Masaaki Kijima: Graduate School of Social Sciences, Tokyo Metropolitan University
Yuan Tian: Faculty of Economics, Ryukoku University

No 858, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: 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.

Keywords: Investment; Capital structure; Quasi-hyperbolic discounting; Entrepreneurial finance (search for similar items in EconPapers)
JEL-codes: D92 G02 G11 G32 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.kier.kyoto-u.ac.jp/DP/DP858.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:858

Access Statistics for this paper

More papers in KIER Working Papers from Kyoto University, Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Makoto Watanabe ().