BUSI 4500 Lecture Notes - Lecture 5: Net Present Value, Bounded Rationality, Misplaced Loyalty
7 May 2018
School
Department
Course
Professor
Lecture 5
Behavioral Corp Finance
- Use bias & irrationality to explain less optimal corp decision
- Type of bias
o Overconfidence
o Bounded rationality
o others
- framework
o managers irrational, x investors
o analysts & investors irrational. X managers
o all 3 irrational
- literature
o capital structure
▪ rational manager/ irrational investor
• issue equity when investors + abt stock
• repurchase when –
• optimal, consistent with empirical facts
▪ irrational (opp)
• undervalue stock
• result more debt
• suboptimal
o investment decision
▪ rational manager/ irrational investor
• investors misevaluate –NPV
• if managers x accept –NPV = poor manager
• make less optimal decision when investor is
irrational
▪ irrational
• accept –NPV project
• wealth destruction
Article
1. Behavioral consistency in corporate finance: CEO personal and corporate
leverage, Cronqvist et al. (2012)
- Hypotheses
o Behavioral consistency
▪ Consistent behavior, + CEO debt vs firm debt
o Hedging
▪ Hedge position, - CEO vs firm debt
- Methodology
-
o dependent variable = total debt/MV of asset
o proxy of CEO debt = mortgage of CEO
- result
o + CEO vs firm debt
o consistent, x hedge for high levered CEO (HL80)
0 1 2 3
8 9 10
/ 80 80 * ...
Pr ..
D A Homelev HL HL Homelev
mktbk Assets ofit
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Use bias & irrationality to explain less optimal corp decision. Type of bias: overconfidence, bounded rationality, others framework, managers irrational, x investors, analysts & investors irrational. Article: behavioral consistency in corporate finance: ceo personal and corporate leverage, cronqvist et al. (2012) Hypotheses: behavioral consistency, consistent behavior, + ceo debt vs firm debt, hedging, hedge position, - ceo vs firm debt. 8: dependent variable = total debt/mv of asset, proxy of ceo debt = mortgage of ceo ofit. Homelev result: + ceo vs firm debt, consistent, x hedge for high levered ceo (hl80, behavioral finance in corporate governance: economics and ethics of the devil"s advocate, morck (cid:523)2004(cid:524) Bod inefficies relate to obey of ceo. Solution: increase independent directors, appoint non executive chair (more authority figure, the effect of reference point prices on mergers and acquisitions, baker et al. (2012) Examine impact of anchoring & ref pt pricing on m&a. Sample: 7020 m&a deal on us firm, 1984-2007.
