Herding behavior and firms financing decisions: The case of Central and Eastern European countries

Presentation by Gabriela Brendea (Babeș-Bolyai University) as part of the Economics Department seminar series at the IOS.

According to the behavioral corporate finance theories, managers are not fully rational when they make financing decisions (Park and Sohn, 2013). Managers may have different biases regarding financing behavior (e.g., overconfidence, optimism, risk aversion, herding), which result in decisions that negatively influence firm’s market value and hinder the maximization of this value (see Baker, Ruback, & Wurgler, 2004; Hackbarth, 2008, for overviews). Herding behavior assumes that managers establish firms’ debt ratios (DRs) according to the mean DR of the activity sector to which the firms belong to (Zeckhauser et al., 1991) or according with the DR of the sector’s leader (determined based on some criteria such as net sales, survey: Filbeck et al., 1996). This research proposal aims at investigating the financing decisions of firms from Central and Eastern European (CEE) countries by accounting for herding behavior. More specifically, we aim at determining whether CEE listed firms try to reach, during the period 2010-2020, the mean DR of the sector they belong to, moving away from the optimal capital structure that maximizes firms’ value..