Behavioral Corporate Finance

by Shefrin, Hersh

• ISBN13: 9780072848656
• ISBN10: 0072848650
• Edition: 1st
• Format: Paperback
• Copyright: 2005-11-18
• Publisher: MCG

Summary

Behavioral Corporate Finance identifies the key psychological obstacles to value maximizing behavior, along with steps that managers can take to mitigate the effects of these obstacles. The main goal of the book is to help students learn how to put the traditional tools of corporate finance to their best use, and mitigate the effects of psychological obstacles that reduce value.

Table of Contents

Preface	xiv
Acknowledgments	xvii
Behavioral Foundations	1	(19)
Traditional Treatment of Corporate Financial Decisions	1	(1)
Behavioral Treatment of Corporate Financial Decisions	2	(1)
Illustrative Example	3	(1)
Biases	3	(5)
Excessive Optimism	3	(3)
Overconfidence	6	(1)
Confirmation Bias	7	(1)
Illusion of Control	8	(1)
Heuristics	8	(2)
Representativeness	8	(1)
Availability	9	(1)
Anchoring and Adjustment	9	(1)
Affect Heuristic	10	(1)
Framing Effects	10	(5)
Loss Aversion	11	(2)
Aversion to a Sure Loss	13	(2)
Debiasing	15	(3)
Summary	16	(1)
Additional Behavioral Readings	16	(1)
Key Terms	16	(1)
Explore the Web	17	(1)
Chapter Questions	17	(1)
Additional Resources and Materials for Chapter 1 are available at www.mhhe.com/shefrin	18
Minicase: Wall Street of the Southwest	18	(1)
Case Analysis Questions	18
How Psychologists Identify Behavioral Phenomena	1	(1)
Biases	1	(6)
Excessive Optimism	1	(2)
Overconfidence	3	(2)
Confirmation Bias	5	(1)
Illusion of Control	6	(1)
Heuristics	7	(5)
Representativeness	7	(2)
Availability	9	(1)
Anchoring and Adjustment	10	(1)
Interacting Phenomena	11	(1)
Framing Effects	12	(8)
Attitudes toward Risk and Loss	12	(1)
Aversion to a Sure Loss	13	(2)
Narrow Framing Bias	15	(5)
Valuation	20	(18)
Traditional Approach to Valuation	20	(1)
Valuation Heuristics	21	(1)
P/E Heuristic	21	(1)
PEG Heuristic	21	(1)
Price-to-Sales Heuristic	22	(1)
A CFO's Reliance on Valuation Heuristics	22	(1)
How Analysts Value Firms: An Illustrative Example	23	(4)
Analyst Mary Meeker	23	(1)
Mary Meeker's Target Prices for eBay	24	(3)
Biases	27	(4)
Biases and Heuristics	27	(1)
Biases and Framing Effects	27	(4)
Other Sources of Bias	31	(3)
Growth Opportunities	31	(1)
PEG and DCF	32	(1)
The 1/n Heuristic	33	(1)
Excessive Optimism	33	(1)
Agency Conflicts	34	(3)
Summary	35	(1)
Additional Behavioral Readings	35	(1)
Key Terms	35	(1)
Explore the Web	35	(1)
Chapter Questions	36	(1)
Additional Resources and Materials for Chapter 2 are available at www.mhhe.com/shefrin	37
Minicase: Palm Inc.	37	(1)
Case Analysis Questions	37
Computing Free Cash Flows and Growth Opportunities	1	(1)
eBay's Financial Statements	1	(1)
Free Cash Flows	2	(3)
Deriving Free Cash Flows	3	(1)
Interpreting Sources of Free Cash Flow	4	(1)
Interpreting Uses of Free Cash Flow	4	(1)
Cash Earnings	4	(1)
Confusing Growth Opportunities and Earnings Growth	5	(33)
PEG	5	(1)
The Market's Judgment about eBay's (N)PVGO	6	(1)
Book-to-Market Equity: What Makes eBay a Growth Stock?	7	(1)
EVA and Value	7	(1)
The Growth Opportunities Formula	8	(30)
Capital Budgeting	38	(18)
Traditional Treatment of Capital Budgeting	38	(1)
Survey Evidence	39	(1)
Project Adoption Criteria	39	(1)
The Importance of Intuition	40	(1)
The Affect Heuristic	40	(2)
Choice, Value, and the Affect Heuristic	41	(1)
Overconfidence	42	(2)
Psychological Determinants of Overconfidence	42	(1)
Illustrative Example of Overconfident Capital Budgeting	43	(1)
Excessive Optimism in Capital Budgeting	44	(4)
Excessive Optimism in Public-Sector Projects	44	(1)
Excessive Optimism in Private-Sector Projects	44	(1)
Psychological Determinants of Excessive Optimism	45	(1)
Agency Conflict Determinants of Excessive Optimism	46	(2)
Reluctance to Terminate Losing Projects	48	(2)
Aversion to a Sure Loss	48	(1)
Escalation of Commitment	49	(1)
Confirmation Bias: Illustrative Example	50	(4)
Behavioral Bias and Agency Conflicts at Syntex	50	(2)
Summary	52	(1)
Additional Behavioral Readings	53	(1)
Key Terms	53	(1)
Explore the Web	53	(1)
Chapter Questions	53	(1)
Additional Resources and Materials for Chapter 3 are available at www.mhhe.com/shefrin	54
Minicase: CompuSys	54	(1)
Case Analysis Questions	55
Excessive Optimism, Framing Effects, and Cost Accounting	1	(1)
Using Forecasts Prepared by Others	1	(2)
Implications	3	(1)
Cost Accounting	3	(53)
The Framing of Costs	3	(1)
Heuristics	4	(52)
Perceptions about Risk and Return	56	(18)
Traditional Treatment of Risk and Return	56	(1)
Risk and Return for Individual Stocks	57	(7)
Example	57	(1)
Risk, Representativeness, and Bias	58	(1)
Evidence That Executives Rely on Representativeness	59	(1)
Sign of Relationship between Risk and Return	59	(1)
The Affect Heuristic	60	(1)
Heuristics, Biases, and Factors	61	(1)
Analysts' Return Expectations	62	(2)
Financial Executives and the Market Risk Premium	64	(2)
Die-Rolling	64	(1)
Extrapolation Bias: The Hot-Hand Fallacy	65	(1)
Biased Financial Executives' Estimates	66	(1)
Investor Biases in Estimating the Market Risk Premium	66	(2)
Individual Investors and the Hot-Hand Fallacy	66	(1)
Professional Investors and Gambler's Fallacy	66	(2)
Executives, Insider Trading, and Gambler's Fallacy	68	(2)
Survey Evidence on Project Discount Rates	70	(4)
Summary	70	(1)
Additional Behavioral Readings	71	(1)
Key Terms	71	(1)
Explore the Web	71	(1)
Chapter Questions	72	(1)
Minicase: Intel and eBay	72	(1)
Case Analysis Questions	73	(1)
Inefficient Markets and Corporate Decisions	74	(18)
Traditional Approach to Market Efficiency	74	(1)
The Market Efficiency Debate: Anomalies	75	(3)
Long-Term Reversals: Winner-Loser Effect	76	(1)
Momentum: Short-Term Continuation	76	(1)
Post-Earnings-Announcement Drift	77	(1)
Limits of Arbitrage	78	(2)
Pick-a-Number Game	78	(2)
Market Efficiency, Earnings Guidance, and NPV	80	(1)
Stock Splits	81	(1)
Example: Tandy's Stock Split	81	(1)
To IPO or Not to IPO?	82	(10)
Three Phenomena	82	(1)
IPO Decisions	83	(5)
Summary	88	(1)
Additional Behavioral Readings	89	(1)
Key Terms	89	(1)
Explore the Web	89	(1)
Chapter Questions	89	(1)
Minicase: The IPO of Palm	90	(1)
Case Analysis Questions	91	(1)
Capital Structure	92	(18)
Traditional Approach to Capital Structure	92	(1)
How Do Managers Choose Capital Structure in Practice?	93	(3)
New Equity: Market Timing	93	(1)
New Debt: Financial Flexibility	94	(1)
Target Debt-to-Equity Ratio	95	(1)
Traditional Pecking Order	96	(1)
Behavioral APV	96	(2)
Perception of Overvalued Equity: New Issues	96	(1)
Perception of Undervalued Equity: Repurchases	96	(2)
Financial Flexibility and Project Hurdle Rates	98	(1)
Undervalued Equity: Cash-Poor Firms Reject Some Positive NPV Projects	98	(1)
Undervalued Equity for Cash-Limited Firms: Invest or Repurchase?	98	(1)
Sensitivity of Investment to Cash Flow	99	(2)
Excessive Optimism, Overconfidence, and Cash	101	(4)
Identifying Excessively Optimistic, Overconfident Executives	102	(2)
Assessing Value	104	(1)
Conflict Between Short-Term and Long-Term Horizons	105	(5)
Summary	106	(1)
Additional Behavioral Readings	107	(1)
Key Terms	107	(1)
Explore the Web	107	(1)
Chapter Questions	107	(2)
Minicase: PSINet	109	(1)
Case Analysis Questions	109	(1)
Dividend Policy	110	(17)
Traditional Approach to Payouts	110	(1)
Changes in Tax Policy	111	(1)
Changing Attitudes and Perceptions about Risk	111	(1)
Dividends and Individual Investors: Psychology	112	(4)
Self-Control and Behavioral Life Cycle Hypothesis	114	(1)
Dividends and Risk	115	(1)
Insights from Financial Columnists	116	(1)
Empirical Evidence	116	(2)
Contrast with Institutional Investors	117	(1)
How Managers Think about Dividends	118	(4)
Changing Payout Policies: Some History	118	(1)
Survey Evidence	119	(3)
Catering to Investors' Tastes for Dividends	122	(5)
Citizens Utilities Company	123	(1)
Catering and Price Effects	123	(1)
Summary	124	(1)
Additional Behavioral Readings	124	(1)
Key Terms	125	(1)
Explore the Web	125	(1)
Chapter Questions	125	(1)
Minicase: Nipsco	126	(1)
Case Analysis Questions	126	(1)
Agency Conflicts and Corporate Governance	127	(18)
Traditional Approach to Agency Conflicts	127	(1)
Paying for Performance in Practice	128	(2)
Low Variability	128	(1)
Dismissal	129	(1)
Stock Options	129	(1)
Shareholder Rights	129	(1)
Behavioral Phenomena	130	(1)
Overconfidence among Directors and Executives	130	(2)
Overconfident Directors	130	(1)
Insufficient Variability in Pay for Performance	130	(1)
Better-Than-Average Effect in the Boardroom: Overpayment	131	(1)
Stock Option-Based Compensation	132	(1)
Overvaluing Options	132	(1)
Casino Effect	132	(1)
Auditing: Agency Conflicts and Prospect Theory	133	(2)
Traditional Perspective	134	(1)
Sarbanes-Oxley	135	(1)
Fraud and Stock Options: Illustrative Example	136	(7)
Signs of Disease?	139	(2)
Summary	141	(1)
Additional Behavioral Readings	141	(1)
Key Terms	141	(1)
Explore the Web	141	(1)
Chapter Questions	142	(1)
Additional Resources and Materials for Chapter 8 are available at www.mhhe.com/shefrin	143
Minicase: Tyco	143	(1)
Case Analysis Question	144
Ethics and Fairness in Finance	1	(1)
Unethical Behavior Starts Early	1	(2)
Why Students Cheat	2	(1)
Ethics and Psychology	2	(1)
Ethics, Fairness, and Financial Market Regulation	3	(142)
Behavioral Aspects of Fairness	4	(2)
Fairness and Confidence	6	(139)
Group Process	145	(16)
Traditional Approach to Group Process	145	(1)
Process Loss	145	(1)
General Reasons for Group Errors	146	(1)
Groupthink	146	(1)
Poor Information Sharing	146	(1)
Inadequate Motivation	147	(1)
Groupthink and Poor Information Sharing: Illustrative Examples	147	(7)
Enron	148	(3)
Imagine Yourself in the Boardroom	151	(1)
WorldCom	152	(1)
PSINet	153	(1)
Polarization and the Reluctance to Terminate Losing Projects	154	(1)
Debiasing: Illustrative Example	155	(5)
Standards	155	(1)
Planning	156	(1)
Compensation	156	(1)
Information Sharing	157	(1)
Stock Ownership	157	(1)
Summary	158	(1)
Additional Behavioral Readings	158	(1)
Key Terms	158	(1)
Explore the Web	158	(1)
Chapter Questions	159	(1)
Additional Resources and Materials for Chapter 9 are available at www.mhhe.com/shefrin	160
Minicase: Shugart	160	(1)
Case Analysis Questions	160
Examples of Poor Group Process	1	(1)
The Packard Foundation	1	(3)
Governance and Groups	1	(3)
The Hewlett Foundation	4	(1)
General Findings about Investment Committees	4	(1)
The Endowment Effect	5	(1)
Motivation and Incentives: Residual Income	6	(155)
Illustrative Example: AT&T	7	(1)
Questions	8	(153)
Mergers and Acquisitions	161	(20)
Traditional Approach to M&A	161	(1)
The Winner's Curse	162	(1)
Optimistic, Overconfident Executives	162	(3)
Theory	165	(4)
Symmetric Information, Rational Managers, and Efficient Prices	165	(1)
Excessive Optimism and Overconfidence When Prices Are Efficient	166	(1)
Inefficient Prices and Acquisition Premium	167	(1)
Asymmetric Information	168	(1)
AOL Time Warner: The Danger of Trusting Market Prices	169	(4)
Strategy and Synergy	169	(1)
Valuation	169	(2)
Asset Writedown	171	(1)
Hubris	172	(1)
Hewlett-Packard and Compaq Computer: Board Decisions	173	(6)
The Merger Alternative	174	(1)
Psychological Basis for the Decision to Acquire Compaq	174	(1)
Valuation	175	(1)
H-P's Board Accepts Reality	176	(1)
Summary	177	(1)
Additional Behavioral Readings	177	(1)
Key Terms	178	(1)
Explore the Web	178	(1)
Chapter Questions	178	(1)
Additional Resources and Materials for Chapter 10 are available at www.mhhe.com/shefrin	179
Minicase: PSA Peugeot Citroen SA and DaimlerChrysler AG	179	(1)
Case Analysis Question	180
Avoiding the Winner's Curse in M&A	1	(1)
Avoiding the Winner's Curse	1	(5)
Analytical Solution	1	(5)
Two Monty Hall Problems	6	(2)
Illustrative Example: Cisco Systems	8	(4)
Cerent Corporation	9	(3)
Illustrative Example: AT&T	12	(1)
Illustrative Example: 3COM and U.S. Robotics	13	(168)
Risks and Benefits	14	(1)
Outcome	14	(1)
Additional Questions	15	(166)
Application of Real-Option Techniques to Capital Budgeting and Capital Structure	181
The remaining contents of this chapter are available at www.mhhe.com/shefrin	181
Application of Real-Option Techniques to Capital Budgeting and Capital Structure	1	(182)
Traditional Approach to Option Theory	1	(1)
Do Managers Use Real-Option Techniques?	2	(3)
Opaque Framing?	2	(3)
Valuing Levered Equity	5	(4)
Example	6	(3)
Conflicts of Interest	9	(3)
Example: Small-Scale Project	9	(1)
Asset Substitution	10	(1)
Debt Overhang	11	(1)
Capital Structure	12	(1)
Overconfidence and Excessive Optimism	12	(171)
Overconfidence	12	(1)
Excessive Optimism	13	(4)
Capital Structure	17	(1)
Summary	18	(1)
Additional Behavioral Readings	18	(1)
Key Terms	18	(1)
Explore the Web	19	(1)
Chapter Questions	19	(1)
Minicase: The Savings and Loan Crisis of the 1980s	20	(1)
Case Analysis Question	21	(162)
Glossary	183	(3)
Endnotes	186	(9)
Index	195