Chen, Chang-Chih and Ho, Kung-Cheng and Yan, Cheng and Yeh, Chung-Ying and Yu, Min-Teh (2023) Does ambiguity matter for corporate debt financing? Theory and evidence. Journal of Corporate Finance, 80. p. 102425. DOI https://doi.org/10.1016/j.jcorpfin.2023.102425
Chen, Chang-Chih and Ho, Kung-Cheng and Yan, Cheng and Yeh, Chung-Ying and Yu, Min-Teh (2023) Does ambiguity matter for corporate debt financing? Theory and evidence. Journal of Corporate Finance, 80. p. 102425. DOI https://doi.org/10.1016/j.jcorpfin.2023.102425
Chen, Chang-Chih and Ho, Kung-Cheng and Yan, Cheng and Yeh, Chung-Ying and Yu, Min-Teh (2023) Does ambiguity matter for corporate debt financing? Theory and evidence. Journal of Corporate Finance, 80. p. 102425. DOI https://doi.org/10.1016/j.jcorpfin.2023.102425
Abstract
Traditional tradeoff theories puzzlingly predict that firms use high leverage, issue debt carrying a high duration and low yield spread, and have optimal debt policies highly affected by managerial risk-shifting behavior. We offer an ambiguity-based explanation for these corporate debt puzzles. The key intuition is that ambiguity-averse managers hold the worst-case belief about EBIT growth, resulting in upward (downward) distortion of bankruptcy (restructuring) probability. While firms under ambiguity aversion take less leverage, optimal leverage increases with ambiguity (if holding information constraints fixed). Our theoretical predictions about the impact of ambiguity aversion on corporate debt financing are supported by empirical evidence. Moreover, we document that the tradeoff models allowing for ambiguity aversion achieve a better performance in fitting real data, and information-constraint heterogeneities can be a distinctive determinant of leverage variations.
Item Type: | Article |
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Uncontrolled Keywords: | Ambiguity; Information constraints; Corporate debt; SMM estimation; Pricing kernel |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 15 May 2023 16:35 |
Last Modified: | 16 May 2024 21:51 |
URI: | http://repository.essex.ac.uk/id/eprint/35616 |
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Embargo Date: 12 November 2024