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Bounded Rationality and the Active Management of Capital Structure
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.ORCID iD: 0000-0003-3676-1007
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The literature seeks new determinants to explain variations in firm capital structure. The traditional determinants of capital structure assume agents’ rationality through agency theory. However, their rationality in the active management of capital structure is questionable, due to variations observed in corporate leverage policies across firms. One explanation for these variations could be that rational behaviour is circumscribed by different constraints, for example, financial and governance constraints, such that rationality is bounded. Under bounded rationality, managers make satisfactory and sufficient decisions, so-called satisficing decisions. I use a capital adjustment model as a base and transform it into one that estimates the intensity of the active management of capital structure. I do so by adding managers’ traits to estimate their satisficing effects on leverage growth as a measure of the active management of capital structure under a constraint system. I use managerial discretionary index as a measure of managerial traits and I find that the managerial discretionary index is associated with leverage growth, and the differences in the active management of corporate leverage under various constraints are in line with the competing pecking order and trade-off capital structure theories. My findings imply that managerial traits are determinants of the active management of capital structure.

Keywords [en]
Satisficing effect, managerial discretion, active management of capital structure, leverage capacity, governance mechanism
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-176377OAI: oai:DiVA.org:su-176377DiVA, id: diva2:1375015
Available from: 2019-12-03 Created: 2019-12-03 Last updated: 2019-12-04Bibliographically approved
In thesis
1. The Art of Discretion: Essays on Earnings Management, Governance, and Capital Structure
Open this publication in new window or tab >>The Art of Discretion: Essays on Earnings Management, Governance, and Capital Structure
2020 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation is a compilation of three articles on earnings management, governance and capital structure. In addition to these three articles, the introductory chapter establishes the link between these articles and summarizes them.

Article I investigates the joint effect of governance mechanisms on earnings management. This study finds evidence in support of imperfect substitution and complement effects of corporate governance and industry regulation on earnings management.

Article II investigates the role of the discretionary environment for earnings management, using several measures of governance and contextual mechanisms. The findings of this article show that the discretionary environment matters in explaining earnings management practices. Therefore, the use of a tractable and quantifiable measure of the discretionary environment has the potential to refine measures of earnings management and mitigate the mixed inferences made from these measures in the literature. Hence, this study contributes to the literature by augmenting accrual-based earnings management models with governance and contextual mechanisms.

Article III examines the role of managerial traits in the active management of capital structure within the boundaries of a system of financial and governance constraints. The findings of this article show that the managerial discretionary index as a measure of managerial traits is associated with leverage growth and the satisficing effect is statistically significant. The results also show that the association is nonlinear under some combinations of financial and governance constraints (relatively low and high constraints), and linear in others.

Place, publisher, year, edition, pages
Stockholm: Stockholm Business School, Stockholm University, 2020. p. 17
Keywords
earnings management, accruals modelling, corporate governance, industry regulation, capital structure, bounded rationality, substitution effect, complement effect
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-176316 (URN)978-91-7797-949-4 (ISBN)978-91-7797-950-0 (ISBN)
Public defence
2020-01-30, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 13:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following papers were unpublished and had a status as follows: Paper 1: Manuscript. Paper 2: Manuscript. Paper 3: Manuscript.

Available from: 2020-01-07 Created: 2019-12-01 Last updated: 2019-12-13Bibliographically approved

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CiteExportLink to record
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