CEO EMOTIONAL BIAS AND CAPITAL STRUCTURE CHOICE. BAYESIAN NETWORK METHOD

This research examines the determinants of firms’ capital structure introducing a behavioral perspective that has received little attention in corporate finance literature. The following central hypothesis emerges from a set of recently developed theories: firms managed by loss aversion, optimistic and/or overconfident people will choose more levered financing structures than others, ceteris paribus. The article explains that the main cause of capital structure choice is CEO emotional bias (optimism, loss aversion and overconfidence). I will use Bayesian network method to examine this relation. Emotional bias has been measured by means of a questionnaire comprising several items. As for the selected sample, it has been composed of some100 Tunisian executives. Our results have revealed that the behavioral analysis of financing options implies the presence of pecking order choice (Pecking Order Theory, POT). CEO (optimistic, loss aversion, and overconfidence) prefer to finance their projects primarily through internal capital, by debt in the second hand and finally by equity.