Abstract:
This study examines the influence of cognitive bias of the managers in the selection
and usage practice of capital budgeting techniques of listed companies in Colombo
Stock Exchange (CSE). Although many studies have been conducted in relation to
behavioral finance and corporate decisions, sufficient evidences have not yet been
found from the previous seminal works relating to the influence of cognitive
behavioral biases of managers in the selection and usage practice of the quantitative
techniques of capital budgeting process (CBT) or capital investment decision
process. Therefore, this study was aimed to investigate three closely related
behavioral biases (managerial overconfidence, optimism and risk perception bias)
and their influence on the selection and usage practice of capital budgeting
techniquesin Sri Lanka. The primary data were collected for this study using a selfadministered questionnaire from 104 CFOs working in listed companies in CSE.
The study revealed that CFOs optimism and overconfidence were positively
correlated with the advanced capital budgeting methods only in NPV
andstatistically not significant with IRR and PI. Meanwhile, both cognitive biases
werestatistically not significant with PB, ARR and DPBof simple capital budgeting
methods. However,CFOs optimism and overconfidence werepositively correlated
with RO and SA of sophisticated capital budgeting methods. Meanwhile,CFOs risk
perception was not supported with any of the methods other than PB. The study
also summarized that firms in listed in CSE rarely use sophisticated capital
budgeting methods for their capital investment decision. This study concludes that
manager’s behavioral characteristics significantly influence on the selection and
usage practice of capital budgeting techniques of listed companies in Colombo
Stock Exchange (CSE).
