Behavioral vs. Traditional Corporate Finance: An Unabashed Critical Review

Abstract

Research in behavioral corporate finance has accumulated to the point that it may now be a viable contender as an alternative to traditional corporate finance. This review consists of three parts. First, I discuss the foundations behind these two competing theories. I clarify concepts such as rational versus irrational behaviors of managers contrasted with those of the investors. Second, I make side by side comparisons and a critical examination of the two theories in the main topic areas of dividends, capital structure, and investments. Part three gives practical suggestions on how practitioners may use behavioral finance in their dealings as well as avoid known behavioral biases.

Keywords: Corporate finance, behavioral finance, dividends, capital structure, corporate investments.

JEL Classification: G3,G1,G02,K