Biased beliefs, costly external finance, and firm behavior: A Unified theory

Arbeitspapier

Overconfidence and overextrapolation are two behavioral biases that are pervasive in human thinking. A long line of research documents that such biases influence business decisions by distorting managers' expected productivity. We propose a new mechanism in which the biases change firms' precautionary motives when external financing is costly, finding that the influences of biases on investment, payouts, and refinancing are stronger for financially weaker firms. Moreover, biased and rational firms display di erential responses to economic booms and busts holding financial positions constant. Our work illustrates that managerial traits, when interacting with imperfect capital markets, drive firm dynamics in business cycles.

Object Details

• ISBN: 978-952-323-293-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 18/2019

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Payout Policy ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Li, Delong ; Lu, Lei ; Mu, Congming ; Yang, Jinqiang
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/212452
• Last update: 10.03.2025, 11:44 AM CET