Managerial Behavior and Capital Structure Decisions; Do Overconfidence, Optimism and Risk Aversion Matter?

Abstract

This study aims at examining the importance of managers’ behavior in explaining the capital structure related decisions of the listed firms in the Egyptian stock exchange (EGX). Managers’ behavior data has been collected using a survey method (i.e. psychometric test) which specifies three aspects of the behavior (namely: overconfidence, optimism, and risk aversion) in addition to some demographic characteristics as suggested by previous studies particularly Graham et al. (2013) and Menkhoff et al. (2006). The sample of the study includes 47 mangers and 31 firms along with their related financial information which has been extracted from the published financial statements for a period of 3 consecutive years. The secondary data of the Egyptian firms and the responses from survey were fully analyzed. A cross sectional analysis is applied to assess the effect of the managers’ behavior on the corporate financial leverage level. Further, a hierarchal type of regression is used due to the existence of some control variables. The findings of the study reveal that managerial optimism and risk tolerance have a significant positive impact on the firm's leverage ratio, while managerial overconfidence has no significant impact on the firm's capital structure. Moreover, risk averse managers differ from non-risk averse managers in terms of the adopted leverage level of their firms, as risk averse managers tend to use lower leverage ratio level.