 Does ambiguity matter for corporate debt financing? Theory and evidenceChang-Chih Chen, Kung-Cheng Ho, Cheng Yan, Chung-Ying Yeh and Min-Teh Yu () Journal of Corporate Finance, 2023, vol. 80, issue C Abstract: Traditional tradeoff theories puzzlingly predict that firms use high leverage, issue debt carrying a high duration and low yield spread, and have optimal debt policies highly affected by managerial risk-shifting behavior. We offer an ambiguity-based explanation for these corporate debt puzzles. The key intuition is that ambiguity-averse managers hold the worst-case belief about EBIT growth, resulting in upward (downward) distortion of bankruptcy (restructuring) probability. While firms under ambiguity aversion take less leverage, optimal leverage increases with ambiguity (if holding information constraints fixed). Our theoretical predictions about the impact of ambiguity aversion on corporate debt financing are supported by empirical evidence. Moreover, we document that the tradeoff models allowing for ambiguity aversion achieve a better performance in fitting real data, and information-constraint heterogeneities can be a distinctive determinant of leverage variations. Keywords: Ambiguity; Information constraints; Corporate debt; SMM estimation; Pricing kernel (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:80:y:2023:i:c:s0929119923000743 DOI: 10.1016/j.jcorpfin.2023.102425 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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