Behavioral Corporate Finance: A Survey

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.

A century of corporate takeovers: What have we learned and where do we stand?

“…They argue that the conglomerate wave of the 1960s was in part driven as a managerial response to 'a temporary investor appetite for conglomerates'. Baker et al (2004) state that the investors' demand for the shares of conglomerates was high during the 1960s and the market greeted diversifying acquisitions with positive announcement returns. The reduction in the size of such announcement effects 14 since 1968 suggests 'a switch in investors' appetite' away from diversifications.…”

“…Perhaps, these disadvantages of diversification have outweighed the alleged advantage of internal cross-subsidisation and lessened the attractiveness of diversifying takeovers in the 1980s. Baker et al (2004) further explain the trend towards corporate focus and specialization from a behavioural corporate finance point of view. They argue that the conglomerate wave of the 1960s was in part driven as a managerial response to 'a temporary investor appetite for conglomerates'.…”

Optimism and economic choice☆

“…3 For more on the link between optimism and financial economics, see Barberis and Thaler (2003) for a broad survey of behavioral finance, Baker, Ruback, and Wurgler (2004) for a survey of the literature on behavioral corporate finance, and Hirshleifer (2001) for a survey of how psychology affects asset prices. 4 See Peterson (2000) for a fascinating discussion of the history of optimism.…”

Optimism and Economic Choice

“…3 For more on the link between optimism and financial economics, see Barberis and Thaler (2003) for a broad survey of behavioral finance, Baker, Ruback, and Wurgler (2004) To adjust our standard errors, we follow techniques described in Montalto and Sung (1996a) and Little and Rubin (1987). The correct standard error is the average of the standard errors from each imputation, plus an add-on that accounts for the variation across implicates.…”