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Manager Characteristics and Capital Structure: Theory and Evidence

Published online by Cambridge University Press:  08 June 2011

Sanjai Bhagat ,
Brian Bolton  and
Ajay Subramanian
Sanjai Bhagat
Affiliation:
Leeds School of Business, University of Colorado at Boulder, Campus Box 419, Boulder, CO 80309. sanjai.bhagat@colorado.edu
Brian Bolton
Affiliation:
School of Business Administration, Portland State University, PO Box 751, Portland, OR 97207. bbolton@pdx.edu
Ajay Subramanian
Affiliation:
Robinson College of Business, Georgia State University, 35 Broad St. NW, Atlanta, GA 30303. insasu@langate.gsu.edu
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Abstract

We investigate the effects of manager characteristics on capital structure in a structural model. We implement the manager’s optimal contracts through financial securities that lead to a dynamic capital structure, which reflects the effects of taxes, bankruptcy costs, and manager-shareholder agency conflicts. Long-term debt declines with the manager’s ability, inside equity stake, and the firm’s long-term risk, but increases with its short-term risk. Short-term debt declines with the manager’s ability, increases with her equity ownership, and declines with short-term risk. We show support for these implications in our empirical analysis.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1581 - 1627
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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