Impact of Behavioral Biases on Long Term Financial Decisions and Corporate Performance: An Evidence from Non-Financial Sector of Pakistan

Abstract

Purpose: In this study, the relationship of managerial biases i.e. mental accounting, optimism and loss aversion with corporate performance is investigated. For path analysis, we explored this relationship through two subdomains of long term financial decisions (capital structure and dividend policy). Moreover, in this study, the mediating role of capital structure and dividend policy was also theorized and tested on the above-stated relationship. Sample/ Methodology/Approach: The sample of the study consisted of eighty-five (n=85) CEOs, CFOs, General Managers and Financial Treasurers of the nonfinancial sector (listed in Pakistan Stock Exchange). Primary data was collected through closed ended questionnaire by using convenience sampling technique. Statistical technique PLS-SEM was applied for data analysis by using SMART PLS 3.2 statistical package. Findings: The findings of the study depicted that behavioral biases influence corporate performance as managers take a decision under the influence of personal feelings, perceptions, and intuitions. We also inferred from the results that the effect of biases (mental accounting, optimism, and loss aversion) is significant on long term financial decisions. We also found that dividend policy and capital structure mediates the relationship between optimism and mental accounting with corporate performance. Originality/Value: This research study fills the gap in existing literature by investigating the relationship of managerial biases with corporate performance through the path of long term financial decisions of corporate financial managers. Previously, extensive research work is available on basic topic that how dividend policy and capital structure affect corporate performance, however, we found comparatively quite less discussion on stimulating forces (behavioral biases) for financial decision making and this gap is covered by this study through explaining the impact of behavioral biases on long term financial decisions which further devastate corporate performance. This study as an empirical evidence is helpful for researchers, academicians, and practitioners to understand and implement the notions coined by behavioral finance, regarding the effects of behavioral biases on long term financial decisions. Keywords: Optimism, Loss Aversion, and Mental Accounting, Long term financial decision, Corporate Performance, Pakistan.