FIN-04-024

Behavioral Corporate Finance: A Survey

October 2004

Malcolm Baker, Richard S. 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.

Malcolm Baker
Institution: Harvard Business School
Email: mbaker@hbs.edu


Richard S. Ruback
Institution: Harvard Business School
Email: rruback@hbs.edu


Jeffrey Wurgler
Institution: Stern School of Business, New York University
Email: jwurgler@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~jwurgler

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