Business Review (Dec 2022)

Impact of CEO overconfidence on corporate financing decision with mediating role of risk perception

  • Amina Batool ,
  • Tahira Awan ,
  • Sumayya Chughtai

DOI
https://doi.org/10.54784/1990-6587.1375
Journal volume & issue
Vol. 16, no. 2
pp. 83 – 101

Abstract

Read online

The purpose of this paper is to investigate the impact of managerial (Chief Executive Officer) overconfidence on corporate financing decision with the mediating role of risk perception. This study indicates that psychological biases affect the risk perception and ultimately financing decision of top management of an organization. The research design is causal and primary data has been used to test the proposed relationship. Among all the companies listed in the Pakistan Stock Exchange, researchers have selected top executives of 200 companies as a sample. E-Questionnaire has been used to collect the required data through LinkedIn and other mailing sources. Researcher has done a linear regression to find the relationship between independent variable overconfidence and dependent variable that is leverage. Baron and Kennys four-step mediation has been used to test the mediation effect of risk perception. Results of this study conclude that there is a significant positive relationship between overconfidence of CEO and leverage while there is a significant negative relationship between CEO overconfidence and risk perception. However, there is an insignificant result for the mediating role of risk perception between CEO overconfidence and leverage. Extensive research work is available on basic topic of how dividend policy and capital structure affect corporate performance; however, we found insufficient literature on psychological forces (behavioural biases) for financial decision making. The gap is covered by this study through explaining the impact of behavioural biases on corporate financial decisions which further distresses corporate performance. The results are significant for company top management, regulators and policy makers. This study as an empirical evidence is also helpful for researchers, academicians, and practitioners to understand and implement the notions coined by behavioural finance, regarding the effects of behavioural biases on corporate financial decisions that ultimately affects the corporate performance. The results are in line with previous studies on emerging economies.

Keywords