Behavioral Corporate Finance: A Survey

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

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Behavioral Corporate Finance: A Survey

NBER Working Paper No. w10863

63 Pages Posted: 28 Oct 2004 Last revised: 8 Sep 2022

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: November 2004

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.

Suggested Citation: Suggested Citation

Baker, Malcolm P. and Ruback, Richard S. and Wurgler, Jeffrey A., Behavioral Corporate Finance: A Survey (November 2004). NBER Working Paper No. w10863, Available at SSRN: https://ssrn.com/abstract=612064