Present-Bias Manager and Capital Structure of a Firm

This study analyses the effect of present bias on a firm’s capital structure decisions. With the growth in behavioural corporate finance literature, researchers have found evidence of financial decisions being affected by managers apart from firm-, industry- and country-level factors. Using panel data of 1,515 firms listed in the BSE A and BSE B categories from 2011 to 2023, the study found a negative relation between present bias and the level of debt. However, in the case of a financing deficit faced by the firm, the present-bias manager is more aggressive in issuing debt. Contrary to the traditional belief, the study found a positive effect of present bias on firm performance. However, the lower level of debt opted for by present-bias managers reduces long-term firm performance. The study contributes to the literature on behavioural corporate finance by providing novel evidence of present bias in capital structure decisions and by connecting this phenomenon with the traditional pecking order theory. It also contributes to the literature by providing large-sample evidence on the determinants of capital structure in an emerging market context.