CEO overcaution and capital structure choices

Rocciolo, F., Gheno, A. and Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 (2024) CEO overcaution and capital structure choices. Financial Review, 59 (3). pp. 719-743. ISSN 1540-6288 doi: 10.1111/fire.12383

Abstract/Summary

This paper develops and empirically tests a new version of the trade-off theory of corporate capital structure choices that accounts for CEOs’ biased beliefs, with a focus on over- caution. We characterize the bias as a distortion of expected rates of return on equity and debt that, for Overcautious CEOs, are overestimated compared to a rational CEO. The theory shows that if CEOs have higher bias in equity, than in debt-value estimation, overcautious CEOs will choose lower levels of debt compared to rational CEOs, and, if the degree of overcaution is sufficiently high, they will adopt a zero-leverage policy.

Additional Information	Publisher Copyright: © 2024 The Authors. The Financial Review published by Wiley Periodicals LLC on behalf of Eastern Finance Association.
Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/117837
Identification Number/DOI	10.1111/fire.12383
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Additional Information	Publisher Copyright: © 2024 The Authors. The Financial Review published by Wiley Periodicals LLC on behalf of Eastern Finance Association.
Publisher	Wiley
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