Working Paper: NBER ID: w10863
Authors: Malcolm Baker; Richard S. Ruback; Jeffrey Wurgler
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: No keywords provided
JEL Codes: G30; G31; G32; G33; G34; G35; D21; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| irrational investors (G41) | securities prices (G12) |
| securities prices (G12) | managerial decisions (M51) |
| perceived mispricing (D46) | short-term value maximization (L21) |
| managerial biases (D91) | overinvestment (G31) |
| managerial biases (D91) | preference for internal financing (G32) |
| market mispricing (G19) | managerial decision-making (D70) |