Optimistic disclosure tone and conservative debt policy

We examine the relationship between managerial optimism and debt conservatism (i.e. the low-leverage puzzle). Our analysis demonstrates that optimistic tone, our time-varying optimism measure, significantly decreases leverage. This evidence supports the proposition that optimistic managers who consider external financing as unduly costly use debt conservatively. This reduced reliance on external financing can be explained by our further evidence that optimistic tone significantly increases cash holdings and decreases dividend payment. The negative tone-leverage relation is stronger in the presence of high insider purchase of own stocks which confirms that optimistic tone reflects managerial optimism. This study suggests that managerial optimism can help explain the low-leverage puzzle.