THE EFFECT OF COGNITIVE AND EMOTIONAL BIASES ON THE CAPITAL STRUCTURE DECISIONS: A LITERATURE REVIEW

Authors

  • Tekin Bilgehan Cankiri Karatekin University Faculty of Economics and Administrative Sciences, Cankiri, 18100 Central District
  • Gor Yusuf Cankiri Karatekin University Faculty of Economics and Administrative Sciences, Cankiri, 18100 Central District

DOI:

https://doi.org/10.7251/EMC1402286B

Abstract

Each decision-making process is an important cognitive and emotional process which is open to the emotional effect. Individuals make a decision about a future uncertainty either to feel good or maximizing gain by minimizing the loss ratio. Recently, researches in finance have criticized that the capital structure decisions and firms’ funding and strategic choices deviate from the traditional neoclassical paradigm. Furthermore there is a nascent empirical literature that has exposed interesting evidence of the effects of managerial behavioral biases. Managers’ decisions, that to create the capital structure, have a vital importance for the company. The behavioral finance (BF) approach may be revealed useful results in the process of solving decision-makers’ behaviors and thoughts. In this context the purpose of this study is to reveal if the managers are affected by their behavioral characteristics in the process of the financing decision-making, based on the findings of studies in the literature. From this point of view behavioral finance literature, which is about the financing and capital structure decisions, is investigated. As a result, theoretical and empirical analyses, which discussed in the literature, show that managers’ biases play an important role in explaining the capital structure choice.

Author Biographies

Tekin Bilgehan, Cankiri Karatekin University Faculty of Economics and Administrative Sciences, Cankiri, 18100 Central District

PhD Student at the Sakarya University

Gor Yusuf, Cankiri Karatekin University Faculty of Economics and Administrative Sciences, Cankiri, 18100 Central District

PhD Student at the Sakarya University

Published

2014-12-15