Chapter | The Handbook of Corporate Finance: Empirical Corporate Finance | 2002

Behavioral Corporate Finance: A Survey

by Malcolm Baker, Richard Ruback and 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: Decisions; Prejudice and Bias; Debt Securities; Financial Management; Price; Theory; Investment; Problems and Challenges; Behavioral Finance; Corporate Finance;

Citation:

Baker, Malcolm, Richard Ruback, and Jeffrey Wurgler. "Behavioral Corporate Finance: A Survey." In The Handbook of Corporate Finance: Empirical Corporate Finance, edited by Espen Eckbo. New York: Elsevier/North-Holland, 2002.