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

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

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: Optimism Bias; Performance-Sensitive Debt; Debt Contracting; Syndicated Loans (search for similar items in EconPapers)
JEL-codes: G02 G30 G31 G32 (search for similar items in EconPapers)
Date: 2014-07-23
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-cta, nep-ger, nep-hrm and nep-law
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Citations: View citations in EconPapers (6)

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