Behavioral corporate finance has critical implications. Corporate finance practices involve various consideration of behavioral factors. Value-based management is a traditional approach in corporate finance because it focuses on rational behavior, efficient markets, and capital asset pricing model (CAPM) (Shefrin, 2001). Many financial elites have suggested that psychological factors interfere with the behavioral finance paradigm. In this case, psychological forces prevent people from making appropriate decisions and in a rational way; therefore, premiums on security risks are not dependent on security betas. Also, the prices of commodities in markets are not determined by fundamental values. Financial economist has applied more effort to evaluate factors that affect corporate leverage (Cronqvist, Makhija, & Yonker, 2012). The main focus is based on industry, firm characteristics, and market. Companies working under the same industry have closely related corporate leverage due to the similarity of market fundamentals. Loyalty is a significant virtue in financial practices, especially for organizations that desire to underpin government bureaucracies, national economies, political parties, learning institutions, and public corporations. This paper provides evidence-based information on the review of behavioral corporate finance articles.
Motivations for the Study and Research Questions
Motivations for the study vary in each article depending on the research questions. Critical analysis of each article is important is identifying some of the motivations for the study and the research questions. The article by Cronqvist et al. (2012) is based on personal behavior and its implications on corporate performances. Cronqvist (2012) helps all CEOs in financial firms to develop appropriate personal behaviors to improve corporate practices.
- How behavioral issues are important in promoting corporate governance?
- Do Milgram's experiments in psychology show how human nature determinesdetermines their abilities in becoming legitimate authorities?
- What are the effective corporate governance plans that must be applied to improve financial performances?
- The main research questions identified from The Journal of Financial and Quantitative Analysis by Dirk Hackbarth include:
- What are the impacts of managerial traits on corporate financial practices, policy, and firm value?
- How do biased managers interfere with effective financial performances?
Research questions from the article written by Henrik, Anil, and Scott are:
- How do personal behaviors of CEOs affect their leverage choices in the financial context?
- What are the relationships between CEOs' behaviorbehavior and the the financial performances of the organizations they manage?
According to Shefrin (2001), the research questions include:
- What are the implications of behavioral finance on corporate practices?
- How do psychological forces affect the abilities of decision-makersdecision-makers to develop appropriate policies on corporate finance?
Type of Data and Methodology used in the Articles
The article written by Shefrin involves the use of qualitative data. Secondary data sources were used by Shefrin to determine how behavior and other related obstacles affect the internal structure of a financial firm. Secondary sources are used in Shefrin (2001) because information is analyzed based on reported cases. Also, the data are not applied on a real-time basis. Shefrin (2001) used qualitative research methodology because various case studies, phenomenological aspects, discourse analysis were utilized. Also, content analysis and observations were employed in collecting research data.
Cronqvist (2012) used real-time data based on the evaluation of how personal behaviors of CEOs affect corporate performances in a financial firm. Numerical data are used in the article written by Henrik to identify the responses of various research participants on the impacts of personal behavioral factors on financial practices. Primary data sources are used utilized in Henrik's article because real-time events were conducted to determine how the behaviors of CEOs affect their leverage choices in financial practices. Cronqvist (2012) employed quantitative research methodology since various concepts like comparative, true experimentation, and placebo analysis was used.
Morck (2008) used qualitative data to assess how behavioral finance affects corporate governance in an organization. Morck (2008) used secondary data sources due to the incorporation of Milgram experiment to analyze and provide empirical evidence for innate loyalty response based on human behavior. The article written by Morck uses qualitative research methodology due to the application of theoretical models, ethnographic components, and discourse analysis to assess the relationship between loyalty and ethical values in behavioral corporate finance.
The article written by Hackbarth (2008) involves the use of both qualitative and quantitative data. For example, both numerical data and content analysis are utilized in the article to assess the impact of capital structure decisions and managerial traits on corporate financial practices. Hackbarth (2008) uses both primary and secondary data sources to collect appropriate information that helps in determining the impacts of managerial traits incorporate financial performances. A mixed research methodology is used in Hackbarth's article. In the article, various concepts like experimental cases, theoretical models, and comparative are used in the study.
The major Conclusions from each Article
According to Hackbarth (2008), the main conclusion is based on the claims made by psychologists that social effects lead to behavioral biases in corporate finance practices. In these cases, overconfident and optimistic people are normally happier, motivated, willing to help others, and popular in their social contexts. It is recommended for biased managers to make realistic and efficient forecasts that can help in improving corporate financial performances. The main conclusion from Morck (2008) is that effective corporate leadership must be adopted to reinforce surveillances created through loyalty, duty, and trust. Also, the Milgram approach is essential in establishing corporate reforms for improving behavioral finance practices. According to Cronqvist (2012), Behavioral Consistency Theory describes personal behaviors exhibited by people based on their situations. The behaviors developed by CEOs determine the efficacy of decisions made during corporate financial practices. According to Shefrin (2001), the main conclusion is based on the fact that board members and managers should recognize important behavioral impediments during value maximization.
Deficiencies in the Articles
There are empirical deficiencies in the article written by Henrik because it does not provide evidence-based information on how personal behaviors of CEOs affect corporate decision making. Also, Cronqvist (2012) does not describe the variability of data across various states in America. Shefrin (2001) did not offer appropriate information to illustrate why rational managers' intentions of increasing their values may reject operations that provide a short-term advantage.
Comparing and Contrasting the Findings from Articles
The articles written by Randall Morck and Hersh Shefrin are similar because both employ qualitative research methodologies in collecting information for analysis. For example, the two articles used case strategies and content analysis to determine the impacts of behavioral factors on corporate financial performances. Also, Morck (2008) and Shefrin (2008) are similar because they expound on the roles of corporate governance or leadership in shaping the performances of financial firms. The Journal of Financial Economics by Cronqvist et al. (2012) is different from The Journal of Financial and Quantitative Analysis by Hackbarth, (2008) based on the research methodologies employed by the authors. Also, Hackbarth (2008) includes various theories in explaining the implications of managerial traits on corporate financial practices while Cronqvist et al. (2012) uses personal determinants that affect leverage choices. The contraindications identified in the articles arise due to the use of different research methodologies and data sources.
Cronqvist, H., Makhija, A. K., & Yonker, S. E. (2012). Behavioral consistency in corporate finance: CEO personal and corporate leverage. Journal of Financial Economics, 103(1), 20-40. Retrieved from: https://www.sciencedirect.com/science/article/abs/pii/S0304405X11001851
Hackbarth, D. (2008). Managerial traits and capital structure decisions. Journal of Financial and Quantitative Analysis, 43(4), 843-881. Retrieved from: https://www.jstor.org/stable/27647377
Morck, R. (2008). Behavioral finance in corporate governance: economics and ethics of the devil's advocate. Journal of Management & Governance, 12(2), 179-200. doi: 10.1007/s10997-008-9059-4
Shefrin, H. (2001). Behavioral corporate finance. Journal of Applied Corporate Finance, 14(3), 113-126. Retrieved from: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1745-6622.2001.tb00443.x
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