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dc.contributor.authorLewellen, Katharina
dc.date.accessioned2004-02-06T19:44:06Z
dc.date.available2004-02-06T19:44:06Z
dc.date.issued2004-02-06T19:44:06Z
dc.identifier.urihttp://hdl.handle.net/1721.1/4046
dc.description.abstractThis 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 equityen
dc.format.extent428671 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoen_US
dc.relation.ispartofseriesMIT Sloan School of Management Working Paper;4438-03
dc.subjectExecutive Compensationen
dc.subjectStock Optionsen
dc.subjectRisk Incentivesen
dc.subjectLeverageen
dc.titleFinancing Decisions When Managers Are Risk Averseen
dc.typeWorking Paperen


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