 Abstract
This Paper looks at the effects of entrepreneurial optimism on financial contracting and corporate performance. Optimism may increase effort, but is bad for adaptation decisions as the entrepreneur underweights negative information. The first-best contract with an optimist uses contingencies to --ridge the gap in beliefs-- When only debt contracts are possible, we show that insurance motives lead realists to prefer long-term debt, whereas short-term debt is the optimal contract for optimists. With short-term debt, the investor: (1) gets cash-flow claims on states that the optimistic entrepreneur finds relatively unlikely, and the entrepreneur gets as much as possible from the states that they --ream to be true-- (2) gets control in states where the optimistic entrepreneur would behave inefficiently, which decreases the ex-ante cost of capital. We confront our theory with a large dataset of entrepreneurs. We find that differences in beliefs may be (partly) explained by
Authors:
Landier, Augustin & THESMAR, David
(2003)
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Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence
http://ideas.repec.org/p/cpr/ceprdp/3971.html
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