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Article: A Regret Theory of Capital Structure
Title | A Regret Theory of Capital Structure |
---|---|
Authors | |
Keywords | Capital structure Managerial preferences Regret theory |
Issue Date | 2015 |
Publisher | Elsevier. The Journal's web site is located at http://www.elsevier.com/locate/frl |
Citation | Finance Research Letters, 2015, v. 12, p. 48-57 How to Cite? |
Abstract | This paper examines the optimal capital structure of a firm that delegates its financing decision of a risky project to a manager who is both risk averse and regret averse. Regret aversion is characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the manager optimally opts for zero leverage if risk aversion is relatively more important than regret aversion in representing the manager's preferences. Otherwise, the optimal capital structure is interior such that the optimal amount of debt increases when regret aversion becomes increasingly more important than risk aversion in representing the manager's preferences. We further show that the firm's market leverage ratio is inversely related to the project's profitability and to the firm's market-to-book ratio. These comparative static results are consistent with the robust evidence documented in the literature on empirical capital structure. |
Persistent Identifier | http://hdl.handle.net/10722/208297 |
ISSN | 2021 Impact Factor: 9.848 2020 SCImago Journal Rankings: 1.339 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Wong, KP | en_US |
dc.date.accessioned | 2015-02-23T08:20:03Z | - |
dc.date.available | 2015-02-23T08:20:03Z | - |
dc.date.issued | 2015 | en_US |
dc.identifier.citation | Finance Research Letters, 2015, v. 12, p. 48-57 | en_US |
dc.identifier.issn | 1544-6123 | - |
dc.identifier.uri | http://hdl.handle.net/10722/208297 | - |
dc.description.abstract | This paper examines the optimal capital structure of a firm that delegates its financing decision of a risky project to a manager who is both risk averse and regret averse. Regret aversion is characterized by a utility function that includes disutility from having chosen ex-post suboptimal alternatives. We show that the manager optimally opts for zero leverage if risk aversion is relatively more important than regret aversion in representing the manager's preferences. Otherwise, the optimal capital structure is interior such that the optimal amount of debt increases when regret aversion becomes increasingly more important than risk aversion in representing the manager's preferences. We further show that the firm's market leverage ratio is inversely related to the project's profitability and to the firm's market-to-book ratio. These comparative static results are consistent with the robust evidence documented in the literature on empirical capital structure. | en_US |
dc.language | eng | en_US |
dc.publisher | Elsevier. The Journal's web site is located at http://www.elsevier.com/locate/frl | en_US |
dc.relation.ispartof | Finance Research Letters | en_US |
dc.rights | NOTICE: this is the author’s version of a work that was accepted for publication in [Finance Research Letters]. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in PUBLICATION, [VOL 12, (2015)] DOI 10.1016/j.frl.2014.12.001 | en_US |
dc.rights | This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. | - |
dc.subject | Capital structure | - |
dc.subject | Managerial preferences | - |
dc.subject | Regret theory | - |
dc.title | A Regret Theory of Capital Structure | en_US |
dc.type | Article | en_US |
dc.identifier.email | Wong, KP: kpwong@econ.hku.hk | en_US |
dc.identifier.authority | Wong, KP=rp01112 | en_US |
dc.description.nature | postprint | - |
dc.identifier.doi | 10.1016/j.frl.2014.12.001 | en_US |
dc.identifier.scopus | eid_2-s2.0-84922828634 | - |
dc.identifier.hkuros | 242429 | en_US |
dc.identifier.volume | 12 | en_US |
dc.identifier.spage | 48 | en_US |
dc.identifier.epage | 57 | en_US |
dc.identifier.isi | WOS:000349511700007 | - |
dc.identifier.issnl | 1544-6131 | - |