Chapter 4. Behavioral Corporate Finance

Behavioral Corporate Finance provides new and testable explanations for long-standing corporate-finance puzzles in mergers, investment-cash flow sensitivity, and fads in equity financing or dividend payments. The research applies by applying insights from psychology to the behavior of investors, managers, and third parties (e.g., analysts or bankers). corporate finance decisions. capital-structure decisions. This chapter gives an overview of the three leading streams of research and quantifies publication output and trends in the field. It emphasizes how Behavioral Corporate Finance has contributed to the broader field of Behavioral Economics. One contribution arises from the identification of biased behavior (also) in successful professionals, such as CEOs, entrepreneurs, or analysts. This evidence constitutes a significant departure from the prior focus on individual investors and consumers, where biases could be interpreted as ‘low ability,’ and it implies development of much broader applicability and implications of behavioral biases. A related contribution is the emphasis on individual heterogeneity, i.e., the careful consideration of the type of biases that are plausible for which type of individual and situation.