Financing Decisions When Managers Are Risk Averse
This paper studies the impact of financing decisions on risk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impa...
| Main Author: | |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
2004
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/4046 |
| _version_ | 1826189306127974400 |
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| author | Lewellen, Katharina |
| author_facet | Lewellen, Katharina |
| author_sort | Lewellen, Katharina |
| collection | MIT |
| description | This paper studies the impact of financing decisions on
risk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impact on financing decisions. The paper finds: (1) the volatility costs of debt can be large, particularly if the CEO owns in-the-money options; (2) higher option ownership tends to increase, not decrease, the volatility costs of debt; (3) a stock price increase typically reduces managerial preference for leverage, consistent with prior evidence on security issues. Empirically, I estimate the volatility costs of debt for a large sample of U.S. firms and test whether these costs affect financing decisions. I find evidence that volatility costs affect both the level of and short-term changes in debt. Further, a probit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity |
| first_indexed | 2024-09-23T08:13:00Z |
| format | Working Paper |
| id | mit-1721.1/4046 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T08:13:00Z |
| publishDate | 2004 |
| record_format | dspace |
| spelling | mit-1721.1/40462019-04-09T17:23:05Z Financing Decisions When Managers Are Risk Averse Lewellen, Katharina Executive Compensation Stock Options Risk Incentives Leverage This paper studies the impact of financing decisions on risk-averse managers. Leverage raises stock volatility, driving a wedge between the cost of debt to shareholders and the cost to undiversified, risk-averse managers. I quantify these "volatility costs" of debt and examine their impact on financing decisions. The paper finds: (1) the volatility costs of debt can be large, particularly if the CEO owns in-the-money options; (2) higher option ownership tends to increase, not decrease, the volatility costs of debt; (3) a stock price increase typically reduces managerial preference for leverage, consistent with prior evidence on security issues. Empirically, I estimate the volatility costs of debt for a large sample of U.S. firms and test whether these costs affect financing decisions. I find evidence that volatility costs affect both the level of and short-term changes in debt. Further, a probit model of security issues suggests that managerial preferences help explain a firm's choice between debt and equity 2004-02-06T19:44:06Z 2004-02-06T19:44:06Z 2004-02-06T19:44:06Z Working Paper http://hdl.handle.net/1721.1/4046 en_US MIT Sloan School of Management Working Paper;4438-03 428671 bytes application/pdf application/pdf |
| spellingShingle | Executive Compensation Stock Options Risk Incentives Leverage Lewellen, Katharina Financing Decisions When Managers Are Risk Averse |
| title | Financing Decisions When Managers Are Risk Averse |
| title_full | Financing Decisions When Managers Are Risk Averse |
| title_fullStr | Financing Decisions When Managers Are Risk Averse |
| title_full_unstemmed | Financing Decisions When Managers Are Risk Averse |
| title_short | Financing Decisions When Managers Are Risk Averse |
| title_sort | financing decisions when managers are risk averse |
| topic | Executive Compensation Stock Options Risk Incentives Leverage |
| url | http://hdl.handle.net/1721.1/4046 |
| work_keys_str_mv | AT lewellenkatharina financingdecisionswhenmanagersareriskaverse |