Behavioral Corporate Finance: A Survey
62 Pages Posted: 3 Nov 2008
Date Written: October 2004
Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help toexplain a number of important financing and investment patterns. The survey closes with a list of open questions.
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