Abstract:
Behavioral finance traditionally discusses the irrational investor biases to stock purchase decisions and ignored the strategic role and their psychological biases of senior managers. However, recent literature has provided much attention to the Top Management Team’s (TMT) Psychological biases on investment, financing, and dividend decisions. Hence, two important approaches are being studied in line with behavioral finance. The first approach is related to irrational investor bias with rational managers and the second approach is irrational managers with rational investors. This article completely investigates the irrational managers and their corporate decisions, which encompasses CFOs’ optimism, overconfidence, and risk-aversion on future firm performance through the mediating effect of financing decisions. The article also reviews prior research and extensive evidence about how psychological biases of CFOs affect various corporate decisions such as investment, financing, acquisitions, the stock option which in-turn affect firm performance. This is a systemic review of literature on behavioral corporate finance where a
research gap was found that the majority of the past studies documented CEOs/CFOs' behavioral
biases influence either investment decision or financing decision, subsequently not measured firm
performance in their model. Therefore, this review paper provides a conceptual model of CFOs'
behavioral biases influence firm performance with the mediating effect of financing decisions.
This could be the first survey method that analyses the behavioral biases of CFOs in the Sri
Lankan context and bring novel contribution to the existing behavioral corporate finance literature. This review paper also shed light on the direction for future research and recommendation for further studies.
