Capital structure construct: a new approach to behavioral finance

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Within the framework of behavioral finance, this research shows that financial behavior can be assessed as a cognitive construct. Using certain variables, a multidimensional “cognitive finance” construct can thus be established. Through a technological – psychometric type design with descriptive data analysis, a factor analysis is presented to determine which latent variables tend to charge significantly in order to assess the validity of the dimensions comprising the construct of capital structure and explore its dimensions in relation to financial theory. A 44-item questionnaire is adapted and applied to a sample of chief financial officers from diverse public and nonpublic companies in Mexico. The analysis reveals the existence of four construct dimensions consistent with corporate financial theory. The model helps to explain how decision-makers react to uncertainty and environmental conditions, directly affecting the valuation of firm’s losses or earnings. As evidenced by the results, application of the Item Response Theory to the field of behavioral finance could open up new avenues to the study of cognitive biases, involved in the financial decision-making process. Thus, this implies that behavioral finance can also be treated as “cognitive finance.”

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    • Table 1. Items
    • Table 2. Rotated component matrix using the VARIMAX method. Cut level: 0.3
    • Table 3. Reliability tests of the first instrument (Scale 1).
    • Table 4. Reliability tests for the second instrument
    • Table 5. Rotated component matrix with the VARIMAX method. Cut level: 0.3