Behavioral Corporate Finance 1 Outline Rational

Transcript:Behavioral Corporate Finance 1 Outline Rational:
Behavioral Corporate Finance 1 Outline Rational Corporations in Irrational Markets Financial Decisions: Equity offerings, Debt issues, and Dividend policy Investment Decisions: Real investment Managerial biases Financial decisions Investment Decisions: Real investments 2 Rational Corporations-Financial decisions Rational Corporations: Managers behave rationally and attempt to take advantage of investors’ irrationality and temporary market anomalies. Financial Decision: Financial decisions of rational managers in the irrational markets are about catering to investor taste and market timing, that is, supplying the market with instruments that investors are particularly fond of at a given moment in time and taking advantage of temporary mispricing. 3 Rational Corporations-Financial decisions Equity Offerings IPOs: IPOs tend to cluster both in time and in sectors. This kind of clustering could be due to the clustering of real investment opportunities. Private firms may also decide to go public when listed firms from the same sector are valued favorably. The IPO market timing hypothesis is supported by the evidence of poor post-IPO performance both in terms of operational results and negative 4 Rational Corporations-Financial decisions abnormal post-IPO stock returns. SEOs: SEOs also tend to be driven by temporary market overvaluation. The SEOs market timing hypothesis are also supported by poor post-SEO returns. The hypothesis of market overvaluation as one of the key drivers of equity issuance is strongly supported by survey evidence. 5 Rational Corporations-Financial decisions Debt issue Market timing of debt issuances is related to two general aspects: (1) decisions to issue new debt when its cost is unusually low and (2) choices between issuing short- and long-term debts. The willingness to issue debt depends also on company valuation. If the stock is highly overvalued, the firm may decide to finance with equity rather than debt even if the cost of debt is low. 6 Rational Corporations-Financial decisions Survey evidence offers support for market timing being a factor in debt issuance decisions. CFOs interviewed by Graham and Harvey (2001) admitted that they issue debt when they think “rates are particularly low”. Debt maturity: Survey evidence also shows that managers pick short-term debt “when short-term rates are low compared to long-term term rates” and “when waiting for long-term rates to decline”. 7 Rational Corporations-Financial decisions Debt maturity shows a strong negative relation to the difference between long and short-term bond yields (term spread)(Guedes and Opler, 1996: 7,369 debt issues in the United States between 1982 and 1993) Baker, Greenwood, and Wurgler(2003): They find