The Missing Dimension of Risk: Evidence from Inside Debt Maturity and Acquisition Choices

George Y. Nie
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George Y. Nie: Concordia University

No f6nsm_v1, SocArXiv from Center for Open Science

Abstract: Nie (2023) argues that asset risk is cumulative over the holding time length, suggesting that the literature misses the indispensable dimension of time length of managerial risk bound with asset untradability. Using a dummy orthogonalization methodology, I illustrate that the inside debt reduces the effect of age (which negatively proxies maturity) on managerial risk-shifting incentives in M&As, implying that the inside debt risk (captured as risk premium over maturity) approaches zero as maturity approaches zero. An experiment and instrumental variable approach confirm the evidence. The results complement Nie (2023) and challenge, thereby fixing, agency theories such as Jensen and Meckling (1976).

Date: 2023-03-04
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:f6nsm_v1

DOI: 10.31219/osf.io/f6nsm_v1

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