Behavioral Corporate Finance - Introduction
What is Behavioral Corporate Finance?
Definition: Application of behavioral finance principles to corporate managers' financial decisions.
Key Insight: Managers aren't perfectly rational—they exhibit same biases as individual investors.
Main Areas
Capital Structure: How debt/equity mix chosen
Investment Decisions: Which projects to fund (M&A, capex)
Dividend Policy: Payout decisions
Market Timing: Equity/debt issuance timing
Manager Biases
Overconfidence: Overestimate ability, underestimate risks
- Leads to value-destroying M&A
- Excessive leverage
- Under-diversification
Optimism: Overestimate project success
- Over-investment in pet projects
- Underestimate competition
Anchoring: Stuck on historical policies
- Dividend anchored to past levels
- Capital structure inertia
Impact on Firm Value
Positive:
- Manager overconfidence can push profitable but risky innovation
- Optimism drives entrepreneurship
Negative:
- 70%+ of M&A destroy shareholder value (overconfidence)
- Empire-building reduces ROI
- Inefficient capital allocation
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