Ambiguity and the Tradeoff Theory of Capital Structure / Yehuda Izhakian, David Yermack, Jaime F. Zender.

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Izhakian, Yehuda

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w22870.Publication details: Cambridge, Mass. National Bureau of Economic Research 2016.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We examine the impact of ambiguity, or Knightian uncertainty, on the capital structure decision, using a static tradeoff theory model in which agents are both ambiguity and risk averse. The model confirms the well-known result that greater risk--the uncertainty over outcomes--leads firms to decrease leverage. Conversely, the model indicates that greater ambiguity--the uncertainty over the probabilities associated with the outcomes--leads firms to increase leverage. Using a theoretically based measure of ambiguity, our empirical analysis presents evidence consistent with these notions, showing that ambiguity has an important and distinct impact on capital structure.

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November 2016.

We examine the impact of ambiguity, or Knightian uncertainty, on the capital structure decision, using a static tradeoff theory model in which agents are both ambiguity and risk averse. The model confirms the well-known result that greater risk--the uncertainty over outcomes--leads firms to decrease leverage. Conversely, the model indicates that greater ambiguity--the uncertainty over the probabilities associated with the outcomes--leads firms to increase leverage. Using a theoretically based measure of ambiguity, our empirical analysis presents evidence consistent with these notions, showing that ambiguity has an important and distinct impact on capital structure.