Ambiguity and the Tradeoff Theory of Capital Structure

Yehuda Izhakian, David Yermack and Jaime F. Zender

No 22870, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C65 D81 D83 G32 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
Note: CF
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Citations: View citations in EconPapers (1)

Published as Yehuda Izhakian & David Yermack & Jaime F. Zender, 2022. "Ambiguity and the Tradeoff Theory of Capital Structure," Management Science, vol 68(6), pages 4090-4111.

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