Essays in Behavioural, Corporate, and Household Finance

Muhammad Sajid

Research output: ThesisDoctoral Thesis


This thesis consists of three empirical essays that examine various topics in behavioural, corporate, and household finance. In the first essay, we examine: 1) whether risk preferences (both in the domains of gains and losses) and time preferences are affected by managerial cognitive ability, gender, and gender interacted cognitive ability; and 2) whether individual differences in managerial cognitive ability are linked to their susceptibility to a large number of well-known heuristics and cognitive biases. To achieve this, the study, for the first time, focuses on the responses of 601 corporate decision-makers, such as CEOs and CFOs, of 200 non-financial firms listed on the Pakistan Stock Exchange. Using the Cognitive Reflection Test (CRT; Frederick, 2005) as a measure of cognitive ability, we observe that: 1) higher cognitive ability is consistently associated with a higher likelihood of increased patience and a lower likelihood of willingness to take risks in the domain of losses, even after controlling for a rich set of relevant demographic and contextual factors; 2) greater cognitive ability is linked to a higher likelihood of risk-taking in the domain of gains, however, the relationship becomes insignificant after adding controls; 3) female sex is negatively associated with risk-taking in gains, while positively with risk-taking in losses and impatient behaviour; 4) cognitive ability and gender interacted significantly in predicting both risk and time preferences; 5) managers with higher cognitive abilities are less susceptible to the availability heuristic, base-rate neglect, the conjunction error, the conservatism fallacy, and the herding bias; 6) both groups higher and lower in cognitive ability exhibit the anchoring effect, but cognitive ability significantly reduces this effect; and 7) both high and low ability groups are significantly influenced by the framing effect, but cognitive ability does not diminish this effect.
In the second essay, we examine (1) the effects of three well-known cognitive biases (overconfidence, optimism, and illusory control) on the manager’s choice of financing (debt or equity) and (2) whether board independence attenuates the potential adverse effects of managerial biases on capital structure choices. By analysing a unique combined dataset, made up of the survey responses from Pakistani senior executives and hand-collected financial information of the corresponding firms, we find that 1) firms with overconfident managers are likely to have more debt; 2) firms led by highly optimistic managers tend to have higher leverage ratios, including both short- and long-term leverage ratios; 3) firms run by managers with the illusion of control are likely to have more debt, and in particular, more short-term debt; and 4) increased monitoring by a majority-independent board attenuates the negative effects of managerial psychological biases on the amount of debt in a firm’s financial structure. Our main findings are largely robust to a battery of alternative specifications.
In the third essay, we (1) examine the impact of financial literacy and financial confidence on the financial well-being of households in the US and (2) explore whether financial behaviour mediates this relationship. To do so, we used data (N = 27,091) from the most recent wave (2018) of the State-by-State National Financial Capability Study, a large, nationally representative cohort of US adults. Results from multiple regression and mediation analyses, adjusted for relevant controls, show that financial literacy influences financial well-being both directly and indirectly (mediated) through financial behaviour. Our analyses further indicate that financial confidence has a positive impact, both directly and indirectly via financial behaviour, on financial well-being. Overall, our results suggest that higher levels of financial literacy and confidence lead to more responsible financial behaviour, which, in turn, leads to improved financial well-being. The results are robust to a battery of sensitivity checks and different specifications.
Original languageEnglish
Awarding Institution
  • Royal Holloway, University of London
  • Li, Matthew, Supervisor
  • Giouvris, Evangelos, Supervisor
Thesis sponsors
Award date1 May 2023
Publication statusUnpublished - 2023


  • Risk and Time Preferences
  • Cognitive Ability
  • Cognitive Reflection Test
  • Gender
  • Individual Differences
  • Judgment
  • Decision Making
  • Prospect Theory
  • Managers
  • Heuristics
  • Cognitive Biases
  • Overconfidence
  • Optimism
  • Illusion of Control
  • Behavioural Biases
  • Board Independence
  • Corporate Governance
  • Capital Structure
  • Leverage
  • Confidence
  • Financial Behaviour
  • Financial Literacy
  • Financial Well-Being
  • Behavioural Finance
  • Behavioural Corporate Finance
  • Behavioural Economics
  • Household Finance

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