Optimistic Disclosure Tone and Conservative Debt Policy

We examine the relationship between managerial optimism and debt conservatism (i.e., the low‐leverage puzzle). Our analysis demonstrates that optimistic tone, our time‐varying optimism measure, significantly decreases leverage. This evidence supports the proposition that optimistic managers who cons...

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Bibliographic Details
Published in:Abacus (Sydney) 2018-12, Vol.54 (4), p.445-484
Main Authors: Ataullah, Ali, Vivian, Andrew, Xu, Bin
Format: Article
Language:English
Subjects:
Cash
Conservatism
Corporate debt
Debt conservatism
Dividend
Financial leverage
Financing
Insider trading
Leverage
Managerial optimism
Managers
Optimism
Reliance
Tone analysis
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Summary:We examine the relationship between managerial optimism and debt conservatism (i.e., the low‐leverage puzzle). Our analysis demonstrates that optimistic tone, our time‐varying optimism measure, significantly decreases leverage. This evidence supports the proposition that optimistic managers who consider external financing as unduly costly use debt conservatively. This reduced reliance on external financing can be explained by further evidence that optimistic tone significantly increases cash holdings and decreases dividend payment. The negative tone–leverage relation is stronger in the presence of high insider purchase of own stocks, which confirms that optimistic tone reflects managerial optimism. This study suggests that managerial optimism can help explain the low‐leverage puzzle.
ISSN:0001-3072
1467-6281
DOI:10.1111/abac.12140