In the paper, Manager Characteristics and Capital Structure: Theory and Evidence, forthcoming in the Journal of Financial and Quantitative Analysis, we theoretically and empirically investigate the effects of manager characteristics on capital structure. We develop a dynamic principal-agent model that incorporates taxes, bankruptcy costs, and managerial discretion in financing and effort. We derive the manager’s dynamic contract and implement it through financial securities, which leads to a dynamic capital structure for the firm.
We derive novel implications that link manager and firm characteristics to capital structure: (i) Long-term debt declines with manager ability and with her inside equity ownership. (ii) Short-term debt declines with manager ability, and increases with her equity ownership. (iii) Long-term debt declines with long-term risk, and increases with short-term risk. (iv) Short-term debt declines with short-term risk. With the exception of the relation between short-term debt and manager ownership, we show empirical support for the above implications. Our results show that manager characteristics are important determinants of firms’ financial policies.
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