Working Paper: NBER ID: w17333
Authors: Malcolm Baker; Jeffrey Wurgler
Abstract: We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.
Keywords: Behavioral Finance; Corporate Finance; Market Timing; Managerial Biases
JEL Codes: G3; G30; G31; G32; G34; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor behavior (G41) | Mispricing (G19) |
| Mispricing (G19) | Managerial actions (M54) |
| Managerial biases (D91) | Corporate financing decisions (G32) |
| Market conditions (D49) | Managerial behavior (D22) |
| Investor behavior (G41) | Managerial actions (M54) |
| Managerial biases (D91) | Overinvestment (G31) |
| Managerial biases (D91) | Preference for internal financing (G32) |