The Impact of Certain Psychological Factors of Investors and Managers on the Capital Structure

Mirko Babanić

The European Journal of Applied Economics, 2018, vol. 15, issue 1, 20-37

Abstract: Psychology represents the basic requirement for the emergence of disciplines such as behavioral finance and behavioral economics. It has contributed to a better understanding of the behavior of economic actors under conditions of risk arising from the imperfections of cognitive abilities of human beings. Consequently, it is necessary to change the economic models based on mathematical laws in favor of descriptive models that consider the cognitive abilities of the human mind. The most common decisions that are being studied in the field of behavioral finance are the decisions regarding capital structure in companies. The methodology in this paper is based on the net operating income approach. This approach is analyzing the financial section of income statement that refers to the financial expenses of the companies. Financial expenses are assumed to be fixed, determining financial break even, as a consequence of use of financial leverage. The main task of this paper is to determine the impact of some psychological factors in the terms of capital structure and financial leverage, through two case studies of comparative analysis of income statements of the companies Puma and Adidas that will consequently affect the achievement of financial breakevens well as the profitability of the companies. Therefore it is possible to conclude that some analyzed psychological aspects in the process of financial decision making of investors and managers can influence the capital structure decisions, which can be a subject of further researches.

Keywords: Biases; personal beliefs; capital structure; financial leverage; beta coefficient (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:sng:ejae01:93

DOI: 10.5937/EJAE15-15647

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