Managerial Optimism and Debt Contract Design:The Case of Syndicated Loans

We examine the impact of managerial optimism on the inclusion of performancepricing provisions in syndicated loan contracts (PSD). Given their upwardly biased expectations about the firm’s future cash flow, optimistic managers may view PSD as a relatively cheap form of financing. Indeed, we find that optimistic managers are more likely to issue PSD, and choose contracts with greater risk-compensation than rational managers. Consistent with their biased expectations, firms with optimistic managers perform worse than firms with rational managers after issuing PSD. Our results indicate that behavioral aspects can affect contract design in the market for syndicated loans.