Psychological biases and the capital structure decisions: a literature review

Each decision-making process is an important cognitive and emotional process which is open to the emotional effect. Individuals decide to make a decision about a future uncertainty that makes them feel good, or maximally good by minimizing the loss to gain ratio. Recent researches in finance have argued that the capital structure decisions and firms’ funding and strategic choices deviate from the traditional neoclassical paradigm. However there is a nascent empirical literature that has exposed interesting evidence of the effects of managerial behavioral biases. In this context, 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, in the literature, show that managers’ biases play an important role to explain the capital structure choice.