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implement risk avoidance business strategy like vertical integration and prefer to use internal cash for financing (Lin,
Officer & Shen, 2018). Risk in this study defined as uncertainty that leads to higher variance in the revenue stream of the
company and increases the financial risk (Palmer & Wiseman, 1999).

From the behavioral perspective, decision-makers in the company or CEO could experience some cognitive errors.
Many studies show, as the one who held much power in an organization, the CEO is prone to overconfidence (Hwang,
Kim & Kim, 2020; Macenczak. et al., 2016). The CEOs in the ASEAN region might have a higher level of overconfidence
since many study results show overconfidence in ASEAN countries were higher than others (Stankov & Lee, 2014; Acker
& Duck, 2008; Jlassi, Naoui & Mansour, 2014). The implication for CEO overconfidence is higher risk preference either in
business strategy or financing strategy. The risk preference company would escalate when the CEO was overconfident
and more likely to be more active in using debt (Esghaier, 2017; Hackbarth, 2008). This study aims to analyze the
association between corporate strategies with its capital structure through the behavioral perspective and how the
decision maker’s cognitive bias like overconfidence could affect those associations.

2. LITERATURE REVIEW

2.1 Corporate Strategy
The strategy is a combination of corporate actions as an effort to optimize the available resources to produce economic
value (Litov, Moreton, and Zenger, 2012). The business strategy reflects the company’s value as well as the preference
of the management towards risk. In this discussion, three main strategies will be further analyzed, which are vertical
integration, diversification, and internationalization. Vertical integration is the company’s ownership of the production
of inputs needed or the channels through which it distributes its products. The vertical degree tends to correspond to
the number of stages of the industrial chain in which the company participates directly. Diversification is an increase
in various products and services offered by companies or markets and competitive geographical areas (Rothaermel,
2016). Internationalization is the tendency of companies to increase operations across national borders (Cappa et al,
2019).

2.2 Corporate Strategy and Capital Structure
The risks and benefits are quite different for each strategy. The diversification strategy and internationalization strategy
are both considered to have relatively high business risks. High business risk related to a higher level of uncertainty
due to several reasons including competition with existing competitors in the market, high barriers to entry or exit
the market, and especially for internationalization strategies there are other risks like political, social, and exchange
rate. Therefore, companies that implement both strategies are considered to have a high tolerance for risk. Based on
a financial perspective, management also tends to have a higher tolerance for financial risk in debt to pursue lower
capital costs. The implication of these two strategies is a company more likely to use debt as external financing (Barton
& Gordon, 1988; Ckhir & Cosset, 2001; Cappa et al., 2019; Fuente & Velasco, 2020). As the opposite of management that
has a low tolerance for risk, the strategy chosen tends to be preventive like vertical integration strategy. This strategy’s
aim is to eliminating uncertainty in the distribution channel from upstream to downstream. Companies that use a
vertical integration strategy tend to be more conservative so they rely more on internal funding (Lin, Officer & Shen
2018). The implication is the company will further limit the level of debt which is considered to increase the risk of the
company from the financial side.

2.3 The Role of CEO Overconfidence
High or low assessment of risk from the chosen strategy depends on the preferences of the executive or CEO. Through
the behavioral perspective, the CEO as a decision-maker of the company is possible to have a cognitive bias. The most
common cognitive bias that occurs to the one who held much power is overconfidence (Hwang, Kim & Kim, 2020).
When the CEO is overconfident, the preference for risk becomes higher. Overconfidence as bias perception causes
overestimation, overprecision, and over placement related to the risk and benefit of the chosen corporate strategy.
In their study Malmendier & Tate (2015), explained that overconfident executives tend to overinvestment, they are
also active in merging and acquisition both vertically and horizontally (Brown & Sarma, 2007), and more active in
implementing internationalization strategy (Lai, Lin & Chen, 2017). Further Malmendier & Tate (2015) explained that
CEOs whom overconfidence tend to have a pecking order in their financing decision. However, many other studies

International Conference on Sustainability 65
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