Behavioral Finance in a Principal-Agent Model of Capital Budgeting

Topics:
Budgeting,
Project Management
Tags:
Budgeting,
Finance,
Financial Services,
University Of Bath
Source:
University of Bath

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Overview: Recent behavioral research in corporate finance has attempted to analyse the implications of managerial irrationality in capital structure and capital budgeting decisions. The focus of this paper is on the effects of managerial irrationality in capital budgeting. The authors have developed a principal-agent model which provides the basis for an experiment to test for three behavioral factors; reciprocal trust between an investor and a manager, framing behavior resulting in irrational commitment to a project that should be abandoned, and framing behavior combined with managerial overconfidence resulting in excessive effort levels.

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Format: PDF | Size: 206KB | Date: Aug 2004 | Pages: 24

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