Title:
Financing and Debt Maturity Choices by Undiversified Owner-Managers: Theory and Evidence

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dc.contributor.advisor Subramanian, Ajay
dc.contributor.advisor Jayaraman, Narayanan
dc.contributor.author Fu, Jinyi en_US
dc.contributor.committeeMember Clarke, Jonathan
dc.contributor.committeeMember Chakrabarti, Rajesh
dc.contributor.committeeMember Phillips, Richard
dc.contributor.department Management en_US
dc.date.accessioned 2006-09-01T19:35:57Z
dc.date.available 2006-09-01T19:35:57Z
dc.date.issued 2006-07-10 en_US
dc.description.abstract We examine the financing choices of undiversified large shareholders or owner-managers in a continuous time structural model with rational expectations. The interplay between the objective of the undiversified, self-interested owner-manager who controls the firm and the valuation of the firms marketed claims by well-diversified outside investors, has a major impact on leverage and debt maturity choices as well as credit spreads. The effect of this interplay is particularly significant in a world where the representative investor (who determines asset prices in the economy) is risk-averse leading to nonzero market prices of systematic risk and risk premia of the firms investment opportunities. In a perfect information framework with no taxes or bankruptcy costs, we show that, the owner-manager could, depending on the projects characteristics, finance them exclusively with debt, exclusively with equity, or with a combination of equity and debt. Ceteris paribus, leverage increases with the expected growth rate of firm value under its investment opportunities, and decreases with its volatility. Debt maturity varies non-monotonically in a U-shaped manner with the expected growth rate, and decreases with the volatility. Our results reconcile empirical evidence on the variation of financing choices with firm characteristics that is not completely consistent with previous theories. The significant impact of the expected returns (therefore, risk premia) of firms investment opportunities on their leverage ratios, debt maturities, and credit spreads are important implications of our theory that cannot be obtained in these models or in models in which all agents are risk-neutral so that risk premia are zero. We empirically test the implications of our theory for the relationships among firms financing and debt maturity choices and the expected growth rate and volatility of their asset values. Controlling for all the significant determinants of firms financing and debt maturity choices identified by earlier studies, we show significant empirical support for our predictions. en_US
dc.description.degree Ph.D. en_US
dc.format.extent 521729 bytes
dc.format.mimetype application/pdf
dc.identifier.uri http://hdl.handle.net/1853/11587
dc.language.iso en_US
dc.publisher Georgia Institute of Technology en_US
dc.subject Leverage en_US
dc.subject Debt maturity
dc.subject Large shareholders
dc.subject Owner-manager
dc.title Financing and Debt Maturity Choices by Undiversified Owner-Managers: Theory and Evidence en_US
dc.type Text
dc.type.genre Dissertation
dspace.entity.type Publication
local.contributor.advisor Jayaraman, Narayanan
local.contributor.corporatename Scheller College of Business
relation.isAdvisorOfPublication e515504c-ccf6-4212-be18-a62f6443cec2
relation.isOrgUnitOfPublication a2f83831-ae41-4d65-82ff-c8bf95db4ffb
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