Does ambiguity matter for corporate debt financing? Theory and evidence |
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| Institution: | 1. Department of Finance, Providence University, Taiwan, ROC;2. School of Finance, Guangdong University of Economics & Finance, China;3. University of Essex, UK;4. National Chung Hsing University, Taiwan, ROC;5. Providence University and National Tsing Hua University, Taiwan, ROC;1. School of Finance, Jiangxi University of Finance and Economics, China;2. School of Management, Shandong University, China;3. School of Economics and Finance, Massey University, New Zealand;1. Central Bank of Chile, Agustinas 118, 8340454 Santiago, Chile;2. Hunter College & Graduate Center, City University of New York, 695 Park Ave, New York NY 10065, United States;1. Department of Finance, NUS Business School, National University of Singapore, 15 Kent Ridge Drive, BIZ 1 #7-63, 119245, Singapore;2. Department of Accounting, School of Economics and Management, Beihang University, 37 Xueyuan Road, Haidian District, Beijing, 100191, P.R. China;3. Division of Accounting, Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, 639798, Singapore;1. Oslo Business School, Oslo Metropolitan University, Pilestredet 46, Oslo 0130, Norway;2. School of Accountancy, Jiangxi University of Finance and Economics, Nanchang, Jiangxi, China;3. Faculty of Business and Economics, the University of Melbourne, Melbourne, VIC, Australia;4. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;5. College of Business and Economics, Australian National University, Canberra, ACT, Australia |
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| 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. |
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