Behavioral Corporate Finance
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Abstract
To date, scholars working in the area of behavioral finance have mostly focused on asset pricing and portfolio theory, but less so in corporate finance. In this paper, I propose a conceptual framework for applying behavioral ideas to the main topics which comprise corporate finance, and call the approach “behavioral corporate finance.” There are two key behavioral impediments to the process of value maximization, one internal to the firm and the other external. I call the first impediment behavioral costs. In this respect, the behavioral corporate approach deals with four cases or categories, where each category relates to whether corporate managers do or do not behave rationally, and whether financial markets are or are not efficient.