Behavorial finance

1. BEHAVIOURAL
CORPORATE FINANCE
PRESENTED BY
SIMRAN KAUR
MBA 2ND YEAR

2. BEHAVIOURAL CORPORATE FINANCE
 Study of how owners and managers of publicly-traded companies make
decisions that affect the values of those companies
 Examines effects of manager’s and investor’s psychological biases on firms
corporate finance decisions
 Main psychological traps met are: narrow framing, confirmation bias,
hindsight bias, herding behavior conservatism, the role of affects, wishful
thinking, opaque framing, representativeness bias and overconfidence

3. ASSUMPTIONS OF BEHAVIOURAL
CORPORATE FINANCE
 Assumes irrational entrepreneurs or managers
 Postulates irrational investors and limited arbitrage

4. CORPORATE DIVIDEND POLICY
 Refers to the practice that management follows in making dividend payout
decisions
 Have impact on financing decisions of the firm
 Dividends are payments made by a corporation to its shareholders
 Concerned with taking decision regarding paying cash dividend in the present
or paying an increased dividend at a later stage

5. EMPIRICAL DATA ON DIVIDEND PRESENCE
 M&M termed tendency of investors to be attracted to a certain type of
dividend-paying stocks a “dividend clientele effect”
 In a perfect market, each clientele is “as good as another”, thus dividend
policy remains irrelevant
 Dividends per share refers to the dollar amount shareholders earn for each
share, calculated by dividing total dividend amount by total number of shares
outstanding
 Linter model is a basic model that incorporates the dominant determinants of
corporate dividend decisions

6. EMPIRICAL DATA ON DIVIDEND ABSENCE
 If investors migrate to firms that pay the dividends that most closely match
their needs, no firm’s value should be affected by dividend policy
 If a firm rigidly follows the residual distribution policy, then distributions paid
in any given year can be expressed as follows
Distributions = Net Income – Retained earnings needed to finance new
investments
OR
Distributions = Net Income – [(Target equity ratio) x (Total capital budget)]

7. EMPIRICAL DATA ON EX-DIVIDEND DAY
BEHAVIOR
 Ex-dividend means a security which no longer carries the right to the most
recently declared dividend
 Usually 2 business days before the record data
 The seller, not the buyer, will receive the dividend
 Kalay points out that short-term traders can profit from a difference between
the drop in the ex-dividend day stock price and the respective dividend per
share.

8. TIMING OF GOOD AND BAD CORPORATE
NEWS ANNOUNCEMENT
 Time for releasing all relevant information pertaining to a company that may
influence an investment decision
 An accurate timing of good and bad news announcement leads to effective
decision-making
 Principle of manager:
1. Assume that loose lips sink corporate ships
2. Consider honesty to be the best policy
3. Listen to individual’s stock prices

9. SYSTEMATIC APPROACH OF USING
BEHAVORIAL FACTORS
 Heuristic theory
 Prospect theory
 Market factors
 Herding effect

10. NEUROPHYSIOLOGY
 Focuses on relationship between the brain and peripheral nervous system
 Relationship between central nervous system and peripheral nervous system
in causing degenerative diseases like multiple sclerosis and Parkinson’s
disease, as well as neurological disorders like epilepsy
 Factors considered for risk-
1. Dysfunction
2. State of mind
3. Feelings
4. Sensation-seeking behavior
5. Rationality and analytical behavior

11. NEUROPHYSIOLOGY OF RISK TAKING
 One brain region critical for cocaine-seeking behavior is the nucleus
accumbens (NAcc)
 NAcc activation and anterior insula preceded both risky-choices (such as
gambling at casino) and risk-seeking mistakes(such as buying insurance)
 Genetic factors appear to have a life-long influence
 Developmental influences such as family and childhood experiences have
effect on life-long behavior
 Emotional responses are an important factor in real-time processing of
financial risk

12. PERSONALITY TRAITS
 Personality refers to habits, attitudes and other social traits that are
characteristic of a given individual’s behavior
 Personality trait is a durable disposition to behave in a particular way in
variety of situations
 Different types of statistical change
1. Cumulative continuity principle
2. Maturity principle
3. Plasticity principle
4. Social investment principle
5. Identity development principle

13. PERSONALITY TRAITS AND RISK
ATTITUDES IN DIFFERENT DOMAINS
 Openness
 Conscientiousness
 Extraversion
 Agreeableness
 Neuroticism

14. THANK YOU!!!