1、NBER WORKING PAPER SERIESBEHAVIORAL CORPORATE FINANCE: A SURVEYMalcolm BakerRichard S. RubackJeffrey WurglerWorking Paper 10863http:/www.nber.org/papers/w10863NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138October 2004This article will appear in the Handbook in Corpo
2、rate Finance: Empirical Corporate Finance, which isedited by Espen Eckbo. The authors are grateful to Heitor Almeida, Nick Barberis, Zahi Ben-David, EspenEckbo, Xavier Gabaix, Dirk Jenter, Augustin Landier, Alexander Ljungqvist, Hersh Shefrin, Andrei Shleifer,Meir Statman, and Theo Vermaelen for hel
3、pful comments. Baker and Ruback gratefully acknowledgefinancial support from the Division of Research of the Harvard Business School. The views expressed hereinare those of the author(s) and not necessarily those of the National Bureau of Economic Research. 2004 by Malcolm Baker, Richard S. Ruback,
4、and Jeffrey Wurgler. All rights reserved. Short sections oftext, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit,including notice, is given to the source.Behavioral Corporate Finance: A SurveyMalcolm Baker, Richard S. Ruback, and Jeffrey WurglerNBER
5、Working Paper No. 10863October 2004JEL No. G30, G31, G32, G33, G34, G35, D21, D23ABSTRACTResearch in behavioral corporate finance takes two distinct approaches. The first emphasizes thatinvestors are less than fully rational. It views managerial financing and investment decisions asrational response
6、s to securities market mispricing. The second approach emphasizes that managersare less than fully rational. It studies the effect of nonstandard preferences and judgmental biases onmanagerial decisions. This survey reviews the theory, empirical challenges, and current evidencepertaining to each app
7、roach. Overall, the behavioral approaches help to explain a number ofimportant financing and investment patterns. The survey closes with a list of open questions.Malcolm BakerHarvard Business SchoolMorgan Hall 361Boston, MA 02163and NBERmbakerhbs.eduRichard S. RubackHarvard Business SchoolMorgan Hal
8、lBoston, MA 02163rrubackhbs.eduJeffrey WurglerStern School of Business, Suite 9-190New York University44 West 4th StreetNew York, NY 10012and NBERjwurglerstern.nyu.eduTable of Contents I. Introduction.1 II. The irrational investors approach.4 A. Theoretical framework.6 B. Empirical challenges10 C. I
9、nvestment policy 13 C.1. Real investment 14 C.2. Mergers and acquisitions.16 C.3. Diversification and focus 18 D. Financial policy .19 D.1. Equity issues.19 D.2. Repurchases23 D.3. Debt issues24 D.4. Cross-border issues.26 D.5. Capital structure27 E. Other corporate decisions 28 E.1. Dividends .29 E
10、.2. Firm names.31 E.3. Earnings management.32 E.4. Executive compensation33 III. The irrational managers approach34 A. Theoretical framework.36 B. Empirical challenges39 C. Investment policy 40 C.1. Real investment 40 C.2. Mergers and acquisitions.42 D. Financial policy .43 D.1. Capital structure43
11、D.2. Financial contracting.44 E. Other behavioral patterns.44 E.1. Bounded rationality.45 E.2. Reference-point preferences46 IV. Conclusion48 References .51 1 I. Introduction Corporate finance aims to explain the financial contracts and the real investment behavior that emerge from the interaction o
12、f managers and investors. Thus, a complete explanation of financing and investment patterns requires an understanding of the beliefs and preferences of these two sets of agents. The majority of research in corporate finance assumes a broad rationality. Agents are supposed to develop unbiased forecas
13、ts about future events and use these to make decisions that best serve their own interests. As a practical matter, this means that managers can take for granted that capital markets are efficient, with prices rationally reflecting public information about fundamental values. Likewise, investors can
14、take for granted that managers will act in their self-interest, rationally responding to incentives shaped by compensation contracts, the market for corporate control, and other governance mechanisms. This paper surveys research in behavioral corporate finance. This research replaces the traditional
15、 rationality assumptions with potentially more realistic behavioral assumptions. The literature is divided into two general approaches, and we organize the survey around them. Roughly speaking, the first approach emphasizes the effect of investor behavior that is less than fully rational, and the se
16、cond considers managerial behavior that is less than fully rational. For each line of research, we review the basic theoretical frameworks, the main empirical challenges, and the empirical evidence. Of course, in practice, both channels of irrationality may operate at the same time; our taxonomy is
17、meant to fit the existing literature, but it does suggest some structure for how one might, in the future, go about combining the two approaches. The “irrational investors approach” assumes that securities market arbitrage is imperfect, and thus that prices can be too high or too low. Rational manag
18、ers are assumed to perceive mispricings, and to make decisions that may encourage or respond to mispricing. While their 2 decisions may maximize the short-run value of the firm, they may also result in lower long-run values as prices correct. In the simple theoretical framework we outline, managers
19、balance three objectives: fundamental value, catering, and market timing. Maximizing fundamental value has the usual ingredients. Catering refers to any actions intended to boost share prices above fundamental value. Market timing refers specifically to financing decisions intended to capitalize on
20、temporary mispricings, generally via the issuance of overvalued securities and the repurchase of undervalued ones. Empirical tests of the irrational investors model face a significant challenge: measuring mispricing. We discuss how this issue has been tackled and the ambiguities that remain. Overall
21、, despite some unresolved questions, the evidence suggests that the irrational investors approach has a considerable degree of descriptive power. We review studies on investment behavior, merger activity, the clustering and timing of corporate security offerings, capital structure, corporate name ch
22、anges, dividend policy, earnings management, and other managerial decisions. We also identify some disparities between the theory and the evidence. For example, while catering to fads has potential to reduce long-run value, the literature has yet to clearly document significant long-term value losse
23、s. The second approach to behavioral corporate finance, the “irrational managers approach,” is less developed at this point. It assumes that managers have behavioral biases, but retains the rationality of investors, albeit limiting the governance mechanisms they can employ to constrain managers. Fol
24、lowing the emphasis of the current literature, our discussion centers on the biases of optimism and overconfidence. A simple model shows how these biases, in leading managers to believe their firms are undervalued, encourage overinvestment from internal resources, and a preference for internal to ex
25、ternal finance, especially internal equity. We note that the predictions 3 of the optimism and overconfidence models typically look very much like those of agency and asymmetric information models. In this approach, the main obstacles for empirical tests include distinguishing predictions from stand
26、ard, non-behavioral models, as well as empirically measuring managerial biases. Again, however, creative solutions have been proposed. The effects of optimism and overconfidence have been empirically studied in the context of merger activity, corporate investment-cash flow relationships, entrepreneu
27、rial financing and investment decisions, and the structure of financial contracts. Separately, we discuss the potential of a few other behavioral patterns that have received some attention in corporate finance, including bounded rationality and reference-point preferences. As in the case of investor
28、 irrationality, the real economic losses associated with managerial irrationality have yet to be clearly quantified, but some evidence suggests that they are very significant. Taking a step back, it is important to note that the two approaches take very different views about the role and quality of
29、managers, and have very different normative implications as a result. That is, when the primary source of irrationality is on the investor side, long-term value maximization and economic efficiency requires insulating managers from short-term share price pressures. Managers need to be insulated to a
30、chieve the flexibility necessary to make decisions that may be unpopular in the marketplace. This may imply benefits from internal capital markets, barriers to takeovers, and so forth. On the other hand, if the main source of irrationality is on the managerial side, efficiency requires reducing disc
31、retion and obligating managers to respond to market price signals. The stark contrast between the normative implications of these two approaches to behavioral corporate finance is one reason why the area is fascinating, and why more work in the area is needed. 4 Overall, our survey suggests that the
32、 behavioral approaches can help to explain a range of financing and investment patterns, while at the same time depend on a relatively small set of realistic assumptions. Moreover, there is much room to grow before the field reaches maturity. In an effort to stimulate that growth, we close the surve
33、y with a short list of open questions. II. The irrational investors approach We start with one extreme, in which rational managers coexist with irrational investors. There are two key building blocks here. First, irrational investors must influence securities prices. This requires limits on arbitrag
34、e. Second, managers must be smart in the sense of being able to distinguish market prices and fundamental value. The literature on market inefficiency is far too large to survey here. It includes such phenomena as the January effect; the effect of trading hours on price volatility; post-earnings-ann
35、ouncement drift; momentum; delayed reaction to news announcements; positive autocorrelation in earnings announcement effects; Siamese twin securities that have identical cash flows but trade at different prices, negative “stub” values; closed-end fund pricing patterns; bubbles and crashes in growth
36、stocks; related evidence of mispricing in options, bond, and foreign exchange markets; and so on. These patterns, and the associated literature on arbitrage costs and risks, for instance short-sales constraints, that facilitate mispricings, are surveyed by Barberis and Thaler (2003) and Shleifer (20
37、00). In the interest of space, we refer the reader to these excellent sources, and for the discussion of this section we simply take as given that mispricings can and do occur. But even if capital markets are inefficient, why assume that corporate managers are “smart” in the sense of being able to i
38、dentify mispricing? One can offer several justifications. 5 First, corporate managers have superior information about their own firm. This is underscored by the evidence that managers earn abnormally high returns on their own trades, as in Muelbroek (1992), Seyhun (1992), or Jenter (2004). Managers
39、can also create an information advantage by managing earnings, a topic to which we will return, or with the help of conflicted analysts, as for example in Bradshaw, Richardson, and Sloan (2003). Second, corporate managers also have fewer constraints than equally “smart” money managers. Consider two
40、well-known models of limited arbitrage: DeLong, Shleifer, Summers, and Waldmann (1990) is built on short horizons and Miller (1977) on short-sales constraints. CFOs tend to be judged on longer horizon results than are money managers, allowing them to take a view on market valuations in a way that mo
41、ney managers cannot.1Also, short-sales constraints prevent money managers from mimicking CFOs. When a firm or a sector becomes overvalued, corporations are the natural candidates to expand the supply of shares. Money managers are not. Third and finally, managers might just follow intuitive rules of
42、thumb that allow them to identify mispricing even without a real information advantage. In Baker and Stein (2004), one such successful rule of thumb is to issue equity when the market is particularly liquid, in the sense of a small price impact upon the issue announcement. In the presence of short-s
43、ales constraints, unusually high liquidity is a symptom of the fact that the market is dominated by irrational investors, and hence is overvalued. 1For example, suppose a manager issues equity at $50 per share. Now if those shares subsequently double, the manager might regret not delaying the issue,
44、 but he will surely not be fired, having presided over a rise in the stock price. In contrast, imagine a money manager sells (short) the same stock at $50. This might lead to considerable losses, an outflow of funds, and, if the bet is large enough, perhaps the end of a career. 6 A. Theoretical fram
45、ework We use the assumptions of inefficient markets and smart managers to develop a simple theoretical framework for the irrational investors approach. The framework has roots in Fischer and Merton (1984), De Long, Shleifer, Summers, and Waldmann (1989), Morck, Shleifer, and Vishny (1990b), and Blan
46、chard, Rhee, and Summers (1993), but our particular derivation borrows most from Stein (1996). In the irrational investors approach, the manager balances three conflicting goals. The first is to maximize fundamental value. This means selecting and financing investment projects to increase the ration
47、ally risk-adjusted present value of future cash flows. To simplify the analysis, we do not explicitly model taxes, costs of financial distress, agency problems or asymmetric information. Instead, we specify fundamental value as ()KKf , where f is increasing and concave in new investment K. To the ex
48、tent that any of the usual market imperfections leads the Modigliani-Miller (1958) theorem to fail, financing may enter f alongside investment. The second goal is to maximize the current share price of the firms securities. In perfect capital markets, the first two objectives are the same, since the
49、 definition of market efficiency is that prices equal fundamental value. But once one relaxes the assumption of investor rationality, this need not be true, and the second objective is distinct. In particular, the second goal is to “cater” to short-term investor demands via particular investment projects or otherwise packaging the firm and its securities in a way that maximizes appeal to investors. Through such catering activities, managers influence the temporary mispricing, which we represent by the function () , 7 where the arguments of depend on the nature of investor senti