authors:
Malcolm Baker(Harvard Business School)
Richard S. Ruback(Harvard Business School)
Jeffrey Wurgler(Stern School of Business,New York University)
This article will appear in the Handbook in Corporate Finance: Empirical Corporate Finance
Table of Contents
I. Introduction..........................................................................................................................1
II. The irrational investors approach...........................................................................................4
A. Theoretical framework.....................................................................................................6
B. Empirical challenges......................................................................................................10
C. Investment policy ..........................................................................................................13
C.1. Real investment ....................................................................................................14
C.2. Mergers and acquisitions.......................................................................................16
C.3. Diversification and focus ......................................................................................18
D. Financial policy .............................................................................................................19
D.1. Equity issues.........................................................................................................19
D.2. Repurchases..........................................................................................................23
D.3. Debt issues............................................................................................................24
D.4. Cross-border issues ...............................................................................................26
D.5. Capital structure....................................................................................................27
E. Other corporate decisions ..............................................................................................28
E.1. Dividends .............................................................................................................29
E.2. Firm names ...........................................................................................................31
E.3. Earnings management ...........................................................................................32
E.4. Executive compensation........................................................................................33
III. The irrational managers approach........................................................................................34
A. Theoretical framework...................................................................................................36
B. Empirical challenges......................................................................................................39
C. Investment policy ..........................................................................................................40
C.1. Real investment ....................................................................................................40
C.2. Mergers and acquisitions.......................................................................................42
D. Financial policy .............................................................................................................43
D.1. Capital structure....................................................................................................43
D.2. Financial contracting.............................................................................................44
E. Other behavioral patterns...............................................................................................44
E.1. Bounded rationality...............................................................................................45
E.2. Reference-point preferences..................................................................................46
IV. Conclusion.........................................................................................................................48
References .............................................................................................................................51