Handbook of the Economics of Finance

Chapter 5

Behavioral Corporate Finance: An Updated Survey^*

Malcolm Baker^a and Jeffrey Wurgler^b

^aHarvard Business School and NBER, Baker Hall 261, Boston, MA 02163, USA. Tel.: [phone]

^bNYU Stern School of Business and NBER, 44 West 4th St., Suite 9-190, New York, NY 10012, USA. Tel. [phone], [e-mail]

Abstract

We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers’ biases and nonstandard preferences on their decisions. We review relevant psychology, economic ...