NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Yehuda Izhakian

Zicklin College of Business
One Bernard Baruch Way
New York, NY 10010

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org

NBER Working Papers and Publications

November 2016Ambiguity and the Tradeoff Theory of Capital Structure
with David Yermack, Jaime F. Zender: w22870
We examine the importance of ambiguity, or Knightian uncertainty, in the capital structure decision. We develop a static tradeoff theory model in which agents are both risk averse and ambiguity averse. The model confirms the usual idea that increased risk—the uncertainty over known possible outcomes—leads firms to use less leverage. Conversely, greater ambiguity—the uncertainty over the probabilities associated with the outcomes—leads firms to increase leverage. Using a theoretically motivated measure of ambiguity, our empirical analysis provides results consistent with these predictions.
March 2014Risk, Ambiguity, and the Exercise of Employee Stock Options
with David Yermack: w19975
We investigate the importance of ambiguity, or Knightian uncertainty, in executives' decisions about when to exercise stock options. We develop an empirical estimate of ambiguity and include it in regression models alongside the more traditional measure of risk, equity volatility. We show that each variable has a statistically significant effect on the timing of option exercises, with volatility causing executives to hold their options longer in order to preserve remaining option value, and ambiguity increasing the tendency for executives to exercise early in response to risk aversion. Regression estimates for the volatility and ambiguity variables imply similar magnitudes of economic impact upon the exercise decision, with the volatility variable being about 2.5 times stronger.
 
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