Musings on Markets: Behavioral Corporate Finance 1: The Objective in Decision Making:: "When stock prices go up or down on the announcement of an action, there is some aspect of that action that is pleasing or troubling to investors. All too often, markets turn out to be right and managers to be wrong in the long term. In fact, managers who are convinced that their decisions will increase firm value are often operating under some of the same behavioral quirks that affect investors - they are over confident and systematically over estimate their abilities."
SSRN-Behavioral Corporate Finance by Hersh Shefrin:
"Managers and corporate directors need to recognize two key behavioral impediments that obstruct the process of value maximization, one internal to the firm and the other external. I call the first obstruction behavioral costs. Behavioral costs, like agency costs, tend to prevent value creation. Behavioral costs are the costs associated with errors that people make because of cognitive imperfections and emotional influences. The second obstruction stems from behavioral errors on the part of analysts and investors. These errors can create gaps between fundamental values and market prices. When they do, managers may find themselves conflicted, unsure of how to factor the errors of analysts and investors into their own decisions."
Behavioral Corporate Finance: A survey by Baker, Ruback and Wugler:
"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."
Loughran and Ritter (2002, RFS) suggested that CEOs may not be concernedhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=485302
about leaving money on the table in IPOs because the losses are netted
against the rises in stock price in the secondary market. Ljunqvist and
Wilhelm now test this and find that CEOs who are happy with the IPO are
less likely to switch investment bankers for the firm's SEO. Which does
fit the initial story. It should probably be noted that this line of
research (behavioral finance in a corporate setting) is really still in its
infancy. Stay tuned!