The effect of managerial overconfidence on capital structure of firms’ listed on the Nairobi securities exchange

Abstract

This research project examines the effect of managerial overconfidence on capital structure of firms’ listed on Nairobi Securities Exchange for eleven year period between 2000 to 2010. Measure of managerial overcofidence was obtained through managers response to factual questions while stating their confidence level in correctness of their response. Traditional determinants of capital structure was noted and controlled to determine ultimate relationship between managerial overconfidence and levarage of Kenya firms. Data from 48 managers of 24 companies were obtained and analyzed using multiple regression model. Hypothesis that managerial overconfidence affect capital structure of firms’ listed on Nairobi Securities Exchange can not be dismised. Further finding that supports pecking order and market timing theory was observed. It is however, not clear whether management have recognized effect of its own overconfidence to balance between benefit of this cognitive biases and agency problem possed by managers acting as proxies for shareholders. The result show significant homogeneity in financial practices of Kenyan firms. It was observed that that managerial overconfidence does not depend on personal characteristics such as age, education or gender. Market to book is found to be significant determinant of capital structure as documented by previous studies. However, it may not explain the bulk of observed changes as other characteristics of market timing and pecking order theories also featured. Nevertheless, none may be dismissed.