Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Chapter 4

BEHAVIORAL CORPORATE FINANCE*

MALCOLM BAKER
Harvard Business School and NBER, Soldiers Field, Boston, MA 02163, USA
e-mail:[email protected]

RICHARD S. RUBACK
Harvard Business School, Soldiers Field, Boston, MA 02163, USA
e-mail:[email protected]

JEFFREY WURGLER
Stern School of Business and NBER, 44 West Fourth Street, Suite 9-190, New York, NY 10012-1126, USA
e-mail:[email protected]

Contents

Abstract 146
Keywords 146

1. Introduction 147


2. The irrational investors approach 148
   2.1. Theoretical framework 149
   2.2. Empirical challenges 153
   2.3. Investment policy 155
   2.3.1. Real investment 155
   2.3.2. Mergers and acquisitions 156
   2.3.3. Diversification and focus 158
   2.4. Financial policy 158
   2.4.1. Equity issues 159
   2.4.2. Repurchases 161
   2.4.3. Debt issues 162
   2.4.4. Cross-border issues 163
   2.4.5. Capital structure 163

*The authors are grateful to Heitor Almeida, Nick Barberis, Zahi Ben-David, Espen Eckbo, Xavier Gabaix,
Dirk Hackbarth, Dirk Jenter, Augustin Landier, Alexander Ljungqvist, Ulrike Malmendier, Jay Ritter, David
Robinson, Hersh Shefrin, Andrei Shleifer, Meir Statman, Theo Vermaelen, Ivo Welch, and Jeffrey Zweibel for
helpful comments. Baker and Ruback gratefully acknowledge financial support from the Division of Research
of the Harvard Business School.

Handbook of Corporate Finance, Volume 1
Edited by B. Espen Eckbo
Copyright©2007 Elsevier B.V. All rights reserved
DOI: 10.1016/S1873-1503(06)01004-X