Behavioral Corporate Finance: A Survey

Baker, Malcolm P.; Ruback, Richard S.; Wurgler, Jeffrey

doi:10.2139/ssrn.602902

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Behavioral Corporate Finance: A Survey

64 Pages Posted: 20 Oct 2004 Last revised: 12 Aug 2008

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

There are 3 versions of this paper

Date Written: September 29, 2005

Abstract

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 to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

Keywords: capital structure, IPO, SEO, dividend, investment, psychology, bias, optimism, overconfidence, heuristic

JEL Classification: G30, G31, G32, G34, G35

Suggested Citation: Suggested Citation

Baker, Malcolm P. and Ruback, Richard S. and Wurgler, Jeffrey A., Behavioral Corporate Finance: A Survey (September 29, 2005). Available at SSRN: https://ssrn.com/abstract=602902 or http://dx.doi.org/10.2139/ssrn.602902