Present bias, risk management and capital structure

Jan Pape

Journal of Economic Behavior & Organization, 2025, vol. 236, issue C

Abstract: Standard credit risk models assume entrepreneurs maximize long-term equity value, despite significant evidence that entrepreneurs overvalue short-term profits and undervalue future long-term returns. We extend a classical credit risk framework by entrepreneurial myopia and show that myopic entrepreneurs favour lower volatility, while defaulting at a higher cash flow level. Our analysis distinguishes between sophisticated and naive entrepreneurs and shows that naivety leads to lower cash flow volatility and delayed default.

Keywords: Volatility choice; Credit risk; Hyperbolic discounting; Real option (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:236:y:2025:i:c:s0167268125002136

DOI: 10.1016/j.jebo.2025.107094

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