Behavioural Capital Structure: A Systematic Literature Review on the Role of Psychological Factors in Determining the Capital Structure

Abstract

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Capital structure decision is one of the most important business decisions with a significant impact on firm’s performance, valuation, risk, and long term solvency. Firms try to obtain the optimum capital structure to enhance the overall value of the firm. The concept caught the attention of academicians and practitioners since the theory of capital structure was promulgated by Modigliani and Miller in 1958. Since then, various theories of capital structure were developed by leading experts. However, no single theory is universally accepted and applicable due to the complexity of the subject matter. Each firm decides its capital structure, taking into consideration the various internal and external factors affecting the decision. These determinants of capital structure were empirically studied through various researches by various academicians across the world. By reviewing the literature, the study aims to understand the behavioural aspects of the capital structure decision. The paper attempts to understand the behavioural and psychological characteristics of the manager while choosing the capital structure. Individual preferences, biases, choices, and personality traits play a very crucial role in the decision making process, and this sometimes deviates the decisions away from rationality as assumed in the classical financial theories. The paper aims to present a conceptual understanding of the behavioural capital structure by summarising the findings and conclusions of scholarly literature.

Keywords: Determinants of Capital Structure, Behavioural Capital Structure, Managerial Psychology, Emotional and Cognitive Biases

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