Do CEO Overconfidence and International Diversification Strategy Affect the Capital Structure of Shariah Compliant Firms?

Abstract

The proponents of behavioral finance have always argued that managers are always irrational when making financial decisions. Of late, some studies found that capital structure decision made are less than fully rational since it involved the human factor. In addition, the international diversification strategy of a company is said to also affect the capital structure decision. In lieu of this latest development, this study investigated the effect of CEO overconfidence and the international diversification strategy on capital structure’s decisions among Shariah-compliant firms (SCFs) listed in Bursa Malaysia. A two-step system generalised method of moments panel regression model was applied to an annual data of 200 SCFs listed on Bursa Malaysia starting from 2009 to 2017. The empirical results revealed that overconfident CEOs characterized as highly qualified, young and shorter-tenure CEOs were aggressive in making the capital structure decisions. On the other hand, overconfident male CEOs appeared to be less aggressive in making capital structure decisions. Meanwhile, it was revealed that a company that is prone to an international diversification strategy tends to use less total debt and long-term debt. This could be due to the monitoring costs for internationally diversified firms to be probably more expensive than domestic firms.