Manager Characteristics and Capital Structure: Theory and Evidence

Sanjai Bhagat, Brian Bolton and Ajay Subramanian

Journal of Financial and Quantitative Analysis, 2011, vol. 46, issue 6, 1581-1627

Abstract: We investigate the effects of manager characteristics on capital structure in a structural model. We implement the manager’s optimal contracts through financial securities that lead to a dynamic capital structure, which reflects the effects of taxes, bankruptcy costs, and manager-shareholder agency conflicts. Long-term debt declines with the manager’s ability, inside equity stake, and the firm’s long-term risk, but increases with its short-term risk. Short-term debt declines with the manager’s ability, increases with her equity ownership, and declines with short-term risk. We show support for these implications in our empirical analysis.

Date: 2011
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