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Handbook of the Economics of Finance by Rene M. Stulz, Milton Harris, George M. Constantinides

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Chapter 5

Behavioral Corporate Finance: An Updated Survey*

Malcolm Bakera and Jeffrey Wurglerb

aHarvard Business School and NBER, Baker Hall 261, Boston, MA 02163, USA. Tel.: +1 617 495 6566

bNYU Stern School of Business and NBER, 44 West 4th St., Suite 9-190, New York, NY 10012, USA. Tel. +1 212 998 0367, mbaker@hbs.edu

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 ...

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