Capital Structure, Behavioral Finance, and Incomplete Contracts

Anton Miglo ()
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Anton Miglo: Toronto School of Finance

Chapter Chapter 6 in Capital Structure in the Modern World, 2025, pp 113-134 from Springer

Abstract: Abstract Traditional pecking-order theory cannot explain why good-quality firms often issue equity: this is considered an empirical puzzle. Signaling theory of capital structure predicts that good firms issue debt as a signal of quality, which contradicts the well documented negative correlation between debt and profitability. This chapter analyzes the role of behavioral finance in explaining the major empirical puzzles related to capital structure mentioned above as well as some others. Also as we have seen in previous chapters, the allocation of decision-making rights is very important because in many cases different claimholders may have different incentives and make different decisions. An important idea in the area of optimal control rights and other rights allocation is the “property rights approach,” which relies on incomplete contracts. This chapter discusses the important role of this approach in explaining many ideas in the area of capital structure management. The chapter also discusses some other popular topics as the role of investors’ biases for capital structure and connections between capital structure and national culture.

Keywords: Behavioral finance and capital structure; Overconfidence; Incomplete contracts; Property rights approach (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-85459-0_6

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DOI: 10.1007/978-3-031-85459-0_6

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