Comments on Behavioral Corporate Finance

The 4th workshop on behavioral economics November 26, 2005 Kazuhiko OHASHI Graduate School of International Corporate Strategy Hitotsubashi University

Behavioral Finance:
Effects of psychology on financial behavior Capital markets: Asset pricing Investment behavior

Corporate Finance:
Corporate managers vs investors Financial contracting and real investment

 Behavioral Corporate Finance:

Effects of psychology on corporate finance Interaction between capital markets and managerial decision

Important and promising!

Two approaches:
Investors Managers Irrational Rational Rational Irrational

Irrational investors approach Irrational managers approach

 Irrational investors approach

Limit of arbitrage + Irrational investors Mispricing in capital markets Managers take advantage of this mispricing.

Irrational managers approach

Limited corp. gov. + Rational investors Optimism / Overconfidence of managers

Market Timing
Mispricing by Irrational investors Managers act for share holders Issue equity when over-valued Capital structure M&A

Comments/Questions Irrationality of investors:

Are investors rational in the long run? What kind of firms are prone to mispricing? Sophisticated catering to facilitate mispricing?

2Irrational markets agency problem?

Less rational markets = less disciplinary power? Why do managers act for share holders? Characteristics of firms that can induce managers to act for share holders?

3Policy implication:
Social cost of behavioral distortion? Economic policy under irrationality? Can we treat two approaches jointly?

Miscellanea:
Japanese Keiretsu and the Bubble Insulation from short-term market pressure? Need mechanism of corporate governance other than capital market?