Determinants of Capital Structure in Egypt: A Behavioral Approach

Abstract

This thesis examines the determinants of capital structure of firms in Egypt introducing a behavioural approach which received little attention in the empirical study for corporate finance literature. The researcher investigates the hypothesis that emerged from recently developed theories: firms that are managed by biased managers (optimistic and /or overconfident) will choose more debt financing structures than others. The researcher proposes different proxies for managerial optimism / overconfidence, mainly based on mangers sales / returns forecast and forecasted earnings per share. The researcher uses a sample of Egyptian companies listed in the Egyptian stock market in the years 2006 to 2014 and employs robust data estimation procedure to account for false correlation issues. The empirical analysis used strongly suggests that managerial behaviour/ traits have a significant effect on the capital structure and should be taken into consideration as one of the determinants of firm’s capital structure. Specifically the researcher reports a strong positive relation between managerial optimism and leverage ratio. In addition, it confirms that Egyptian companies’ capital structure is mainly following the pecking order theory. The researcher’s results suggest that behavioural approaches (financial managers’ characteristics mainly those related to optimism or overconfidence) can offer relevant contributions to the understanding of corporate decision making.