Managerial over-optimism and agency costs of debt: evidence from high-tech IPO firms in Korea

ABSTRACT

We examine whether the combination of agency costs of debt and managerial optimism in high-tech IPOs creates inefficient R&D investment, thus undermining corporate value. We find that high-tech IPO firms with a high debt ratio exhibit a positive relationship between discretionary and future R&D expenses at the IPO point. We also find a negative relationship between discretionary R&D expenses and the long-term cumulative abnormal return. Furthermore, managerial optimism and agency costs of debt can increase during an IPO, reducing future value. Thus, a stock return decrease after an IPO may be influenced by management’s psychological errors and shareholders’ preferences for risky investments.

KEYWORDS:

• IPO
• high-tech firm
• discretionary R&D expense
• managerial over-optimism
• agency cost of debt

JEL CLASSIFICATION:

• G32
• G34

Acknowledgement

This study was supported by research fund from Chosun University (2020).

Disclosure statement

No potential conflict of interest was reported by the authors.