Date of Award

Summer 2009

Document Type


Degree Name

Doctor of Business Administration (DBA)


Economics and Finance

First Advisor

Dalia Marciukaityte


Management of capital structure is an important part of maximizing the firm value. Financial research has proposed many theories that explain aspects of firm behavior when a firm makes financial decisions that change the firm's capital structure. However, none of the theories fully explain why firms with similar fundamental characteristics make different financing choices.

This study focuses on what motivates managers when they are making external financing decisions. It investigated whether the motivation for the decisions about capital structure are driven by market timing or managerial overoptimism. This is done by focusing on equity and debt issues and whether these issues bring the firms closer to or farther away from their optimal capital structure.

This study finds that the excess leverage proxy is negatively and significantly related to the one, two, and three year post-financing buy-and-hold abnormal returns even when firm characteristics are controlled. These results are also found when non-issuing matched firms, small firms, and large firms are analyzed. These results are consistent with the Managerial Overoptimism Theory.

The results of this study also show that in the first post-financing year firms that issue equity when they are predicted to issue debt significantly out-perform firms that issue equity when they are predicted to issue equity. In addition, firms that issue debt when they are predicted to issue equity perform significantly worse than firms that issue debt and are predicted to issue debt. This holds when firms are matched by size, prior return, and book-to-market and when they are matched by industry, market value of equity, and book-to-market. These results support the Managerial Overoptimism Theory.

In addition, this study shows that the difference in return for firms that are predicted to increase leverage is significantly different than the firms that are predicted to decrease leverage even when controlling for market, size, book-to-market, and momentum factors. The difference in performance is statistically significant at the 1% level for at least three years after external financing is issued.

This study examines press releases mentioning manager optimism or caution (Malmendier and Tate 2008, 24) as a proxy for managerial overoptimism. The results show that the excess leverage proxy and the press proxy for managerial overoptimism are related with a positive correlation. These findings suggest a relationship between the excess leverage proxy and the press proxy for overoptimism and support the validity of the excess leverage proxy as a measure of managerial overoptimism.

This study evaluates what influences manager when they are making decisions about issuing external financing. This question is analyzed using many different evaluation criteria. Overall, the results are opposite to the predictions of the Market Timing Theory and consistent with the Managerial Overoptimism Theory. This suggests that manager's optimism influences their decisions related to external financing.