Influence of behavioural biases and capital structure determinants on capital structure and share price: Regression and path analyses for Indonesian publicly listed firms

Abstract

The relationship between behavioural characteristics (both rational and irrational measures) and capital structure determinants has been empirically validated. This study examines the influence of the behavioural traits of overconfidence and optimism on capital structure determinations by IDX-listed public Indonesian firms’ (Tbks) management. This is statistically tested via a comprehensive hypothesis modelling construct that includes empirically validated capital structure determinants (market timing, profitability, tangibility, size and their impacts on stock price). Panel regression PLS and path analysis were performed on stock price data and financial metrics extracted from the 2013–2020 financial statements of 55 Tbks from the LQ-45 and Kompas-100 stock indices. This study found that Optimism, Market Timing and Adjusted Debt on Market Timing are not determinants of capital structure for Tbks, while Overconfidence and the control variables Firm Profitability, Firm’s Asset Tangibility and Firm Size were statistically validated as capital structure determinants. Overconfidence (as a behavioural bias) is observed to have significant negative influence on management’s capital structure determinations, while Optimism has insignificant positive influence. The less aggressive leveraged models adopted by the sampled Tbks may indicate that implemented good principles of corporate governance have played a role in preventing capital structure determinations skewed by managements’ behavioural biases or psychological tendencies.