Causative dynamics of overconfidence, optimism, framing effects and demographic attributes as capital structure determinants for publicly listed firms in Indonesia

David Rimbo Lim,Edison Hulu,Hendrawan Supratikno,Gracia Shinta S Ugut

doi:10.5267/j.ac.2021.7.009

David Rimbo Lim, Edison Hulu + Show 2 more

https://doi.org/10.5267/j.ac.2021.7.009

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Journal: Accounting	Publication Date: Jan 1, 2022
License type: cc-by

Affiliation: Pelita Harapan University

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This study examines whether capital structure determinations by Indonesian publicly listed firms (Tbks) are influenced by the behavioural biases of overconfidence and optimism, with the underlying rationality frameworks being framed by relevant financial information and impacted by decision-makers’ demographic attributes. Data were obtained from survey respondents and statistically analysed using partial least squares structural equation modelling to identify the indicators of causative dynamics within the hypothesised relationships. Sampled Tbks’ management (CEOs/CFOs) displayed the inherent behavioural traits of overconfidence and optimism in their capital structure determinations. However, such behavioural variables were not statistically proven to significantly influence capital structure decision-making and, hence, were not validated as capital structure determinants. The pecking order framework was revealed to have a significant framing effect on capital structure decision-making by sampled managers. Sampled managers’ demographic attributes and backgrounds were found to be capital structure determinants but did not have a mediating or moderating influence on the modelled relationship between behavioural variables and capital structure.

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This study examines whether capital structure determinations by Indonesian publicly listed firms (Tbks) are influenced by the behavioural biases of overconfidence and optimism, with the underlying rationality frameworks being framed by relevant financial information and impacted by decision-makers’ demographic attributes
The progressive development of modern corporate finance theory has seen the incorporation of behavioural variables into the theoretical frameworks of financial economics, as a complementing discourse to mitigate the challenges to the foundational concept of rationality in decision-making
Behavioural traits as modelled in this research are statistically validated to exert 29.2% influence on the capital structure decision-making by the sampled management (CEOs/CFOs)

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Introduction

The progressive development of modern corporate finance theory has seen the incorporation of behavioural variables into the theoretical frameworks of financial economics, as a complementing discourse to mitigate the challenges to the foundational concept of rationality in decision-making. Studies on capital structure determinants have introduced specific theoretical conceptualisations and research frameworks (Titman & Wessels, 1988; Rajan & Zingales, 1995; Fama & French, 2002; Frank & Goyal, 2004), and it is agreed that capital structure decisions and strategic choices deviate from the traditional neoclassical paradigms (Bilgehan, 2014). This has provided greater impetus for the study of how behavioural characteristics affect financing decision-making

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