Managerial behavioral biases are receiving growing attention in corporate finance. Recent theories have illuminated how biases like overconfidence and optimism can affect various corporate decisions (e.g. Manove and Padilla, 1999; Bernardo and Welch, 2001; Heaton, 2002; Van den Steen, 2004; Coval and Thakor, 2005; and Goel and Thakor, 2008).
There is also a nascent empirical literature that has exposed interesting evidence of the effects of managerial behavioral biases. Malmendier and Tate (2005) find that overconfident CEOs invest more aggressively, and Malmendier and Tate (2008) show that overconfident CEOs are more likely to engage in value-destroying mergers. Ben-David, Graham and Harvey (2007) find that firms with overconfident CFOs maintain higher debt ratios and are less likely to pay dividends or repurchase shares. Puri and Robinson (2007) document that optimistic individuals exhibit systematically different choices compared to others, such as holding less diversified portfolios. Graham, Harvey, and Puri (2007) find evidence consistent with the view that optimistic CEOs expect better future performance.
Persons who file for personal bankruptcy according to Chapter 7 of the US bankruptcy code can generally retain some assets. Specifically, at the state level there tend to be exemptions for certain asset classes up to certain thresholds. The main exemption is the homestead exemption, which enables the filer to retain home equity in his primary residence up to the exemption amount. The homestead exemption ranges from $ 0 in Maryland to an unlimited amount in 8 US states, including Florida and Texas, in 2006. Personal bankruptcy is quite common in the US, with about one million Chapter 7 filings in 2009, and homestead exemptions therefore frequently apply. With a home ownership rate of about 67 percent in the US in 2009, the homestead exemption significantly affects the financial position of households that emerge from personal bankruptcy, especially in high exemption states.
We find a causal effect from capital structure to employee wages, not vice versa. Firms with more debt pay lower wages. The negative effect is robust and strong in state-owned firms and increases in SOEs with larger size, higher leverage ratio, lower profitability, and less growth opportunities. Overall, the results are consistent with the hypothesis that SOEs’ managers with greater control rights that are prone to overpay their employees at expense of ultimate owner, the government. Debt can serve as monitoring device to reduce the managerial agency costs. A standard deviation increase in leverage ratio can increase SOEs’ median profit per employee by 2.03% and double SOEs profitability.
