Effect of Behavioral Biases on Ranking of Financing Decisions by Financial Managers of Firms Listed In the Nairobi Securities Exchange

Dissertation Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Doctor of Business Administration (DBA)The purpose of the study was to determine the effect of managerial behavioral biases on ranking of financing decisions. The study population was senior and middle level financial managers of firms listed in the Nairobi Securities Exchange (NSE). The study was guided by 6 specific objectives, namely: to establish the effect of managerial overconfidence; managerial over optimism; regret aversion; anchoring; mental accounting and conservatism on ranking of financing decisions by financial managers of firms listed in NSE. The level of personal skills and competence was investigated as a moderating variable. The study employed a positivism philosophy and a descriptive correlational design drawing its population from senior and middle level financial managers the 64 firms listed in the NSE as at 31st of December 2015. A two tier sampling was applied; a census at the firm level and purposive sampling at financial manager level resulting with a selection of the top 3 senior to middle level financial managers from each firm. Consequently, the target population was the top three financial managers in each of the firms listed in the NSE resulting in 192 financial managers. A questionnaire was utilised to collect primary data from the selected population. Descriptive statistics, Analysis of Variance (ANOVA) and multinomial logit regression were employed in data analysis. Findings depict that all the selected independent variables had a significant effect on ranking of financing decisions by managers in firms listed in the NSE. Detailed findings reveal that managers who were predisposed to overconfidence, anchoring and mental accounting biases were more inclined towards debt and equity compared to internal capital, with equity most preferred followed by debt then internal sources of capital. However, those with over optimism bias ranked debt highest followed by equity with the lowest ranking for internal capital. On the other hand, managers with a predisposition towards regret aversion and conservatism behavioral biases highly ranked internal capital and debt compared to equity, internal capital was most preferred followed by debt then equity. Further results indicate a significant interaction between the moderating variable (personal skills and competency) and managerial behavioral biases on ranking of financing decisions. Consequently, it is recommended that the implications of overconfidence be considered by financial managers as well as those charged with the responsibility for corporate governance vi to constantly refine financing techniques. This will help handle the new set of challenges that come with need to strike a value adding balance on financing decisions. Specifically, over optimistic financial managers‟ focus should shift from the future to the present. Whilst the regret avert oriented managers should consider referring to decision makers who have proven relevant experience on financing decisions especially when sourcing for long term financing, managers with this type of attribute can be guided by budgeting and forecasting tools when making decisions. Further, on anchoring characteristics, it will be helpful to gain wide range of information on the specific issue requiring evaluation and subsequent decision before taking action. On mental accounting, principles such as segregation of gains, integration of losses, and integration of small losses in big gains, segregation of small gains in big losses which are procedures that effectively regulate economic and other transactions are considered useful. With regard to conservatism as a trait, financial managers in the firms should consider adopting a suitable financial policy that aligns with a commensurate risk appetite for the entity. Finally, the importance of regular and constant development in one‟s area of expertise cannot be overemphasised. The more knowledgeable, more conversant with changes and recent developments, the better the quality of financing decisions that one is able to take. This is especially useful under conditions of information uncertainty as this speaks to one‟s ability to take calculated risks in enhancing the effectiveness of management decisions and actions in times of crisis