Effect of Behavioral Biases on Ranking of Financing Decisions

This book is based on a study conducted to determine the impact of behavioral biases on the nature and extent of financing decisions made by financial managers. Six specific biases were explored: managerial overconfidence managerial overoptimism regret aversion anchoring mental accounting and conservatism. The study population was drawn from financial managers of entities listed on the Nairobi Securities Exchange. Findings revealed that managers predisposed to overconfidence anchoring and mental accounting biases were more inclined towards debt and equity compared to internal capital with equity being most preferred followed by debt and then internal sources of capital. However those with an overoptimism bias ranked debt highest followed by equity with the lowest ranking for internal capital. On the other hand managers with a predisposition towards regret aversion and conservatism biases highly ranked internal capital and debt compared to equity; internal capital was most preferred followed by debt and then equity. Consequently a set of recommendations aimed at enhancing the effectiveness of management decisions is suggested for consideration.