The effect of overconfidence tendencies on financing decisions (debt/equity)

This study examines how the overconfidence tendencies of CFOs and other finance professionals relate to the financial leverage decisions of the firms they represent within the framework of behavioral corporate finance. Understanding the effect of managerial overconfidence on firm-level debt-to-equity ratios is important for evaluating the psychological dimension of capital structure decisions. The sample consists of 57 CFOs and finance professionals who actively participate in financial decision-making processes. Overconfidence was measured using a four-item Likert-type scale adapted from a validated study in the literature, while financial leverage was represented by the debt-to-equity ratio. The calculation of this ratio was based on the financial statements published on the Public Disclosure Platform (KAP) as of 31.12.2024. Due to the small sample size and the predictive orientation of the study, the proposed research model was tested using the PLS-SEM approach. Findings from the measurement model indicate that the scale used demonstrates adequate internal consistency, convergent validity, and discriminant validity. Results from the structural model reveal a negative and statistically significant relationship between overconfidence and financial leverage (β = −0.291, p < 0.01). These findings indicate that highly overconfident finance managers tend to prefer lower levels of debt financing for the firms they represent. This result highlights that the psychological characteristics of financial decision-makers may influence capital structure choices. The study contributes to the literature by providing firm-level empirical evidence on the relationship between behavioral biases and financing decisions within the context of a developing country.