CEO emotional bias and dividend policy: Bayesian network method

Abstract

This paper assumes that managers, investors, or both behave irrationally. In addition, even though scholars have investigated behavioral irrationality from three angles, investor sentiment, investor biases and managerial biases, we focus on the relationship between one of the managerial biases, overconfidence and dividend policy. Previous research investigating the relationship between overconfidence and financial decisions has studied investment, financing decisions and firm values. However, there are only a few exceptions to examine how a managerial emotional bias (optimism, loss aversion and overconfidence) affects dividend policies. This stream of research contends whether to distribute dividends or not depends on how managers perceive of the company's future. We will use Bayesian network method to examine this relation. Emotional bias has been measured by means of a questionnaire comprising several items. As for the selected sample, it has been composed of some 100 Tunisian executives. Our results have revealed that leader affected by behavioral biases (optimism, loss aversion, and overconfidence) adjusts its dividend policy choices based on their ability to assess alternatives (optimism and overconfidence) and risk perception (loss aversion) to create of shareholder value and ensure its place at the head of the management team.

Entrepreneurial orientation and emotional bias in MSMEs’ financing and performance

“…Information asymmetry also leads to financial planning fallacy when entrepreneurs start their business, resulting in cash flow and working capital problems (Dunn & Liang, 2015;Lamptey et al, 2020). Such conditions are due to entrepreneurs' overconfidence that tend to prefer debt financing to equity (Azouzi & Jarboui, 2012). Information asymmetry also enables MSME entrepreneurs to be overoptimistic and overconfident in making operational decisions (Adomdza et al, 2016;Peeters & Czapinski, 1990) that will potentially affect MSME performance (Baker et al, 2018;Raveendra et al, 2018).…”

“…Entrepreneurs who frequently make mistakes in making financial plans for their new firms will potentially face fatal cash flow and working capital problems (Dunn & Liang, 2015;Lamptey et al, 2020). In this respect, overconfident entrepreneurs are more willing to take riskier debt financing than equity (Azouzi & Jarboui, 2012). This behavior is also related to the fact that MSME entrepreneurs tend to be biased in making business decisions that will eventually affect their performance (Baker et al, 2018;Raveendra et al, 2018).…”

Corporate Dividend Policy, Managerial Overconfidence, Myopia, and Investor Irrationality: A Complex Concoction

“…For the total payout, they find insignificant differences between rational and overconfident managers. Azouzi and Anis (2012) examine the influence of managerial emotional biases (i.e. loss aversion, optimism and overconfidence) on dividend policy in Tunisian firms.…”