An Empirical Study of the Impact of Management Behaviour on Capital Structure: Evidence from Dhaka Stock Exchange Ltd

Abstract

Capital Structure plays an important role in maximizing the value of a corporation. The determination of capital structure is a complex issue because diverse factors influence the capital structure of a corporation. Different theories have been developed under different theoretical assumptions and the determination of optimum capital structure is still an unresolved issue. An additional dimension of capital structure has evolved with the development of management behaviour on capital structure decision. Studies related to management behaviour on capital structure have been tested in developed countries using different methodologies. However, the study related to managerial influence on capital structure for developing countries is very small. With this background in mind, this study was undertaken to explore the determinants of capital structure focusing on managerial behaviour in the context of Bangladesh. The purpose of this study is to examine the impact of management behaviour on capital structure decisions in the context of Bangladesh. To find out the behavioural aspects of managers, three variables have been used i.e., overconfidence, optimism and risk aversion. Along with these behaviour-related variables, some demographic variables such as age, gender, tenure, educational level and work experience of managers were considered. Data were collected through a survey method using a structured questionnaire. The survey consists of 70 respondents from the listed companies of Dhaka Stock Exchange Limited. Moreover, other company related variables have been used as control variables. The relevant data were collected from the publicly available financial statements of these companies for the period 2016 to 2020. This study also attempted to focus on the existing theories of capital structure and previous studies to materialize the objective of the study. Feasible Generalized Least Squared Regression (FGLSR) was used to find out the impact of management behaviour on capital structure decisions of Bangladeshi firms. The study reveals that overconfidence, optimism and risk aversion do not have any significant influence on the capital structure of Bangladeshi firms. As for the parameter estimates, out of thirteen variables, six variables were found significant. These variables are age and gender of the manager and profitability, tangibility, size and type of the firm. Thus, these results provide empirical support for the theoretical relationship in determining the capital structure for Bangladeshi firms. It may be mentioned that this study for the first time tested and documented the relationship between management behaviour and the capital structure of Bangladeshi firms.