Behavioral biases and choices of capital structure

: a sample from Portugal

Abstract

Financial literature has for many years focused on firm- and industry-level characteristics to help explain company decision-making, however, theorists have long acknowledged a gap between theoretical models and empirical data. Behavioral finance has more recently emerged as to study the role of managerial heterogeneity in corporate decisions, but there is still no extensive research. This dissertation aims to understand whether executives’ behavioral biases – optimism, risk and loss aversion, and present and confirmation biases – produce an effect on capital structure decisions, represented by the debt and short-term debt ratios, at firms in Portugal. Through a survey-based research and following a similar methodological approach to Graham and collaborators (2013), I was able to infer executives’ biases and collect company data for the year 2020. Results showed that Portuguese executives are biased, being moderately optimistic, highly risk- and loss-averse, and suffering from confirmation bias and a minor present bias. Additionally, I confirmed that optimistic and loss-averse managers incur in higher debt levels while risk-averse executives seek out lower levels of debt. Nonetheless, these biases did not produce an effect on debt maturity preferences, suggesting that firm specificities and the global panorama continue to be the most important explanatory variables. This dissertation therefore concludes that behavioral biases, mainly optimism, risk aversion and loss aversion, produce an effect on Portuguese firms’ choices of debt levels, and should be taken into consideration by decision makers.

Date of Award	30 Jun 2021
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Cristina Soares Pacheco Mendonça (Supervisor)