Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

CEO's Traits, Dynamic Compensation and Capital Structure

Version 1 : Received: 24 July 2018 / Approved: 25 July 2018 / Online: 25 July 2018 (11:45:27 CEST)

How to cite: Ye, W.; Zhang, Y. CEO's Traits, Dynamic Compensation and Capital Structure. Preprints 2018, 2018070479. https://doi.org/10.20944/preprints201807.0479.v1 Ye, W.; Zhang, Y. CEO's Traits, Dynamic Compensation and Capital Structure. Preprints 2018, 2018070479. https://doi.org/10.20944/preprints201807.0479.v1

Abstract

This paper studies a model of dynamic compensation and capital structure with managerial traits. We show that Optimistic manager perceives equity as more undervalued than debt, while, confident manager perceives debt as more undervalued than equity. Managerial risk aversion mitigates manager’s bias. The risk aversion of the optimistic manager has a convex effect on the optimal coupon. There exists the level of risk aversion eliminating the bias on the leverage. The managerial optimist has an ambiguous effect on the owner’s bankruptcy level. The risk aversion has a convex effect on the owner’s bankruptcy level. The optimistic/confident manager underestimates the credit spread. The risk aversion has convex effect on the credit spread. In contrast to rational manager, the optimistic/confident manger has higher level of effort. The risk aversion has a negative effect on the effort.

Keywords

Managerial triats; Dynamic compensation; capital structure

Subject

Business, Economics and Management, Finance

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