...several definitions of behavioural finance exist, there is considerable agreement between them. According to Lintner, “Behavioural finance is the study of how humans interpret and act on information to make informed investment decisions.” Olsen opines that ‘behavioural finance does not try to define ‘rational’ behaviour or label decision making as biased or faulty; it seeks to understand and predict systematic financial market implications of psychological decision processes.’ It should be noted that no unified theory of behavioural finance exists at this time. Behavioural finance is based on research of human and social recognition and emotional tolerance studies to identify and understand incoming economic decisions. Behaviour finance examines recognition and emotional factors influence on the market changes and concentrates on the limited human rationality, explains the psychology effect on the financial activities and argues that financial phenomena can be better explained due to the fact that financial market participants are not rational and their decisions are...
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...Special issue about the study subject 6 2.3. Relating issues raised in the article with the business environment and financial system in Ethiopia 7 2.4. Points we Agree or Disagree with 7 2.5. One part of the article that helped to understand finance 8 III. Hypothesis Comparison. 8 IV. How the information in the article affect the business manager in us 9 4.1. Becoming a better financial manager 9 4.2. Becoming a better professional 9 4.3. Practicing suggestions in the article 9 4.4. Issues listed by the authors 10 References 13 I. Article Summary 1.1. Article Title: The theory and practice of corporate finance: Evidence from the field 1.2. Authors: John R. Graham and Campbell R. Harvey 1.3. Publication: the article is published in the Journal of Financial Economics, Volume 60, Issue 2, Pages 187-243, dated 31/05/2001. The publisher is North-Holland. 1.4. Reviewer: Group 8 members 1. 1.5. Purpose of the Article The article reports the result of a comprehensive survey on the practice of corporate finance conducted in 1999 G.C by the above mentioned two authors in the USA. Unlike previous similar studies in theory and practice of corporate finance, the article address a broader scope in the field of corporate finance including capital budgeting, cost of capital and capital structure, which according to the authors allows “linking responses of survey participants across areas”. Selecting a large sample of cross-section firms with approximate population size of...
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...Journal of Financial Economics 61 (2001) 000-000 The theory and practice of corporate finance: Evidence from the field John R. Grahama, Campbell R. Harveya,b,* aFuqua School of Business, Duke University, Durham, NC 27708, USA bNational Bureau of Economic Research, Cambridge, MA 02912, USA (Received 2 August 1999; final version received 10 December 1999) Abstract We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes. JEL classification: G31, G32, G12 Key words: Capital structure; Cost of capital; Cost of equity; Capital budgeting; Discount rates; Project valuation; Survey *Corresponding author, Tel: 919 660 7768, Fax: 919 660 7971 E-mail address: cam.harvey@duke...
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...Finance theory and Financial strategy Strategic Planning means several things. But it certainly is a part of the decision-making in resource management of the business benefits. Finance theory has significant advantages in understanding the function of capital markets, the valuation of real assets and financial assets. Discounted cash flow analysis(DCF) is a tool that derived from finance theory which has been widely used. However finance theory also has little effect on strategic planning and there are three differences between financial theory and strategic planning: 1. Traditional financial theory and strategic planning might have some differences in language and culture. 2. Discounted cash flow analysis might be used in an incorrect way of strategy therefore it is not acceptable in terms. 3. Discounted cash flow analysis might fail to apply a strategic, even if it is used properly. The most relevant financial concepts in strategic planning is firms’ capital investment decisions and it is also a critical component of “financial theory”. The theory is focused on cash flow and return on the investment. The tool used in investment decisions is net present valued (NPV) which was calculated from present valued minus required investment or which was reduced to discounted cash flow formula because the net present value is a matter of cash flow that will gain in the future. [pic] ...
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...Journal of Financial Economics 60 (2001) 187}243 The theory and practice of corporate "nance: evidence from the "eldଝ John R. Graham , Campbell R. Harvey * Fuqua School of Business, Duke University, Durham, NC 27708, USA National Bureau of Economic Research, Cambridge, MA 02912, USA Received 2 August 1999; received in revised form 10 December 1999 Abstract We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large "rms rely heavily on present value techniques and the capital asset pricing model, while small "rms are relatively likely to use the payback criterion. A surprising number of "rms use "rm risk rather than project risk in evaluating new investments. Firms are concerned about "nancial #exibility and credit ratings when issuing debt, and earnings ଝ We thank Franklin Allen for his detailed comments on the survey instrument and the overall project. We appreciate the input of Chris Allen, J.B. Heaton, Craig Lewis, Cli! Smith, Jeremy Stein, Robert Taggart, and Sheridan Titman on the survey questions and design. We received expert survey advice from Lisa Abendroth, John Lynch, and Greg Stewart. We thank Carol Bass, Frank Ryan, and Fuqua MBA students for help in gathering the data, and Kathy Benton, Steve Fink, Anne Higgs, Ken Rona, and Ge Zhang for computer assistance. The paper has bene"ted from comments made by an anonymous referee, the editor (Bill Schwert), as well as Michael Bradley, Alon Brav, Susan Chaplinsky...
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...From Efficient Markets Theory to Behavioral Finance 1. What does Shiller mean by Behavioral Finance? Behavioral Finance is the collaboration between finance and other social sciences. This field of research is focused on determining the precise degree to which various market forces—including rational analysis of company-specific and macroeconomic fundamentals; human and social psychology; and cultural trends—influence investors’ expectations and determine their level of confidence or fear. Behaviorists believe that at times, the real determinants of stock market movements are the forces of human and cultural psychology, oranimal spirits (a term coined by economist John Maynar 2. How does Behavioral Finance contrast with Efficient Market Theory? Behavioral finance takes issue with two crucial implications of the EMH: (1) that the majority of investors make rational decisions based on available information; and (2) that the market price is always right. Behaviorists believe that numerous factors—irrational as well as rational—drive investor behavior. In sharp contrast to efficient markets theorists, behaviorists believe that investors frequently make irrational decisions and that the market price is not always a fair estimate of the underlying fundamental value. Still, many proponents of behavioral finance agree with at least one implication of the efficient market theory—that it’s not possible to reliably earn abnormal returns. 3. What prediction does Efficient...
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...Finance Theories Taxonomy 1 Finance Theories Taxonomy 2 Finance Theories Taxonomy This document presents a taxonomy of selected finance theories developed in past 5 decades by academics, practitioners and scholars in the United States, Europe, Asia and Latin America. A total of 14 theories and models are synthesized in this work, organized in five tables with the same structure: Theories of capital structure; capital budgeting and cost of equity; asset valuation, financial behavior and international finances. Each table contains theories organized alphabetically with an indication of its germinal or current character. The description of the theory is accompanied by current examples of empirical research that updates or contradicts the theory and additional information about limitations, scope and opportunities of research. Finance Theories Taxonomy 3 Table 1 Finance Theories Taxonomy: Theories of capital structure Theory General description Current examples of the theory Other attributes Modigliani and Miller Germinal theory of corporate finance A review of the theory by Criticism against flaws of M& M theory Theory of investment proposed by Miller and Modigliani Miller himself, offers a new (Ball, 2001) (1958) argues that “the value of a firm view about the so called ‘junk 1. Market perfection. M&M assumed is independent of its capital structure” bonds’ which were considered information was...
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...[pic] Ecole Supérieure Libre des Sciences Commerciales Appliquées Review of Literature Behavioral Finance Presented to Dr. Mohamed EL-Hennawy Group Assignment Prepared By Albert Naguib Noha Samir Wael Shams EL-Din Moshira Gamil Marie Zarif January 2012 | TABLE OF CONTENTS | | | |List of Table………………………………………………………………………….. | |List of Figure ………………………………………………………………………… | |List of Abbreviations/Acronyms ……………………………………………………. | |Introduction……………………………………………………………………….. | |2. Appearance of Behavioral Finance…………………………………………………… | |2.1. Important Contributors…………………………………………………. ………. | |3. Behavioral Biases…………………………………………………………………… ...
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...Accredited Tertiary Courses Listing 2012 Accredited Tertiary Courses Listing 2012 – as at 26 September 2012 1 2012 Accredited Undergraduate Courses AUSTRALIAN CAPITAL TERRITORY The Australian National University University of Canberra NEW SOUTH WALES Australian Catholic University Australian Institute of Higher Education Avondale College Charles Sturt University Kings Own Institute Macquarie University Southern Cross University Top Education Institute The University of New England The University of New South Wales The University of Newcastle The University of Sydney University of Technology, Sydney University of Western Sydney University of Wollongong Williams Business College NORTHERN TERRITORY Charles Darwin University QUEENSLAND Australian Catholic University Bond University Central Queensland University Christian Heritage College Griffith University James Cook University Queensland University of Technology The University of Queensland The University of Southern Queensland University of the Sunshine Coast SOUTH AUSTRALIA Flinders University Kaplan Business School The University of Adelaide University of South Australia Open Universities (conferred by Uni of SA) TASMANIA University of Tasmania VICTORIA Australian Catholic University Cambridge International College Carrick Higher Education Deakin University Holmes Institute Holmesglen Institute of TAFE La Trobe University Melbourne Institute of Technology Monash University Northern Melbourne Institute of TAFE RMIT...
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...An Improved Pedagogy of Corporate Finance: a Constrained Shareholder Wealth Maximization Goal by Michael R. Santos , Gina Vega , John T. Barkoulas INTRODUCTION Bloom's taxonomy (1956) has guided pedagogical structure and innovation for half a century in the United States, and its focus on developmental learning remains relevant and instructive for us. The six developmental levels (knowledge, understanding, application, analysis, synthesis, and evaluation) separate basic knowledge acquisition from the critical thinking and analytical skills necessary for making ethical decisions or judgments. Answering questions about business ethics requires knowledge from multiple disciplines, including philosophy, psychology, political science, sociology, economics, finance, organizational management, and law. Analyzing such a vast body of data in ethical frameworks requires the highest levels (analysis, synthesis, and evaluation) of critical thinking as expressed in the taxonomy. Corporate governance, an interdisciplinary subject addressed in all these disciplines, explores the inter- workings of both for-profit firms and not-forprofit firms and is an area requiring business students to evaluate ethical issues when making decisions. Despite the broad responsibility of teaching corporate governance in the finance classroom, the pedagogy of finance has been restricted to ideas derived primarily from economics, statistics, and finance. Competing ideas from other disciplines are generally...
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...students Programme School of Business Business School of Economics and Finance Economics Finance Major X √ √ Minor √ √ √ II. GPA Requirement A yearly GPA of 3.0 of above as of August 31 (excluding Summer Semester) at the end of the first year of study must be obtained for eligibility to declare any major or minor offered by the Faculty of Business and Economics. For students who fail to meet the GPA requirement at the end of their second year of study, their declaration of FBE major/minor will be removed from the SIS by their home Faculty. III. Requirements for Major Programmes Students are required to complete 60 credits of prescribed courses for each major as follows: (A) Majors offered by the School of Economics and Finance 1. Major in Economics (60 credits) Course code Course Credits Year 1 courses: 12 credits ECON1001 Introduction to economics I 6 ECON1002 Introduction to economics II 6 Year 2 and Year 3 courses: 48 credits ECON2101 Microeconomic theory or 6 ECON2113 Microeconomic analysis 6 ECON2102 Macroeconomic theory or Macroeconomic analysis ECON2114 ECONxxxx/ Year two/Year three courses listed in Economics 36 FINAxxxx or Finance electives Total: 60 2. Major in Finance (60 credits) Course code Course Year 1 courses: 18 credits BUSI1002 Introduction to accounting ECON1001 Introduction to economics I FINA1003 Corporate finance Year 2 and Year 3 courses: 42 credits ECON2101 Microeconomic theory or ECON2113 Microeconomic analysis FINA0301 Derivatives FINA2802...
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...The Development of Modern Finance "A Short History of Value" David Roubaud & Jean-Charles Bagneris 10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured by its beta coefficient • The model calibrates the risk-return relationship • Simple, elegant and linear model => big success • Low explaining power (strong assumptions) • Alternative models are difficult to use 1 The Development of Modern Finance 2 Financial Markets Efficiency "At any given point in time, assets prices on financial markets account for all available information." • Strong assumptions on: – markets organization – investors behaviour • One consequence of EMH is Random Walk Hypothesis • Assumptions are not always true: 3 forms of efficiency (strong, semi-strong, weak) The irrelevance of financing and dividends decisions In a world without taxes and with perfect financial markets...
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...Sivarama Krishnan, University of Central Oklahoma ABSTRACT This paper attempts reconciliation between the two somewhat extreme views espoused by the shareholder wealth maximization paradigm and the stakeholder theory. The stakeholder theory challenges the basic premise built into corporate finance theory, teaching and practice. Corporate finance theory, teaching and the typically recommended practice are all built on the premise that the primary goal of a corporation should be shareholder wealth value maximization. Extant theoretical and empirical research in financial economics also generally accept shareholder wealth maximization as the normative and ideal goal on which all business decisions should be based. This paradigm assumes that there are no externalities and all the participants engaged in transactions with the firm are voluntary players competing in free, fair and competitive markets. A very different view is offered by what is loosely called stakeholder theory. The stakeholder theory posits that the focus on shareholders and firm value is misplaced and managers should be concerned with all stakeholders of the firm. The paper attempts to address what is felt as a lack of dialogue between the two camps. INTRODUCTION Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value. Extant theoretical and empirical...
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...Limits to Arbitrage: Saint Leo University- Chesapeake, Virginia Corporate Finance: MBA 570 Professor Smith April 23, 2014 Abstract Arbitrage is the idea of buying asset which involves no negative cash flow and making a profit with little or no risk. Understanding arbitrage opportunities is not the only ingredient needed to make sharp predictions. The level of irrationality need to be specified by behavior finance researchers. This is related to how they deviate from the Subjective Expected Utility theory. In order to specify the type of irrationality, researchers have turned to experimental evidence complied by cognitive psychologists on the biases that arise when people form beliefs, and on the people’s preferences, given their beliefs or on how they make decisions, Thaler and Barberis (2002). In this paper, we will concentrate on the extensive literature on the Limits to Arbitrage and explain how the theory was conceived, how it evolved over time and apply a scenario to better explain the research. Limits to Arbitrage Understanding arbitrage opportunities is not the only ingredient needed to make sharp predictions. The level of irrationality need to be specified by behavior finance researchers.This is related to how they deviate from the Subjective Expected Utility theory. In order to specify the type of irrationality, researchers have turned to experimental evidence complied by cognitive psychologists on the biases that arise when people form beliefs, and...
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...Behavioural Finance Martin Sewell University of Cambridge February 2007 (revised April 2010) Abstract An introduction to behavioural finance, including a review of the major works and a summary of important heuristics. 1 Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. For more information on behavioural finance, see Sewell (2001). 2 History Back in 1896, Gustave le Bon wrote The Crowd: A Study of the Popular Mind, one of the greatest and most influential books of social psychology ever written (le Bon 1896). Selden (1912) wrote Psychology of the Stock Market. He based the book ‘upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public’. In 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance (Festinger, Riecken and Schachter 1956). When two simultaneously held cognitions are inconsistent, this will produce a state of cognitive dissonance. Because the experience of dissonance is unpleasant, the person will strive to reduce it by changing their beliefs. Pratt (1964) considers utility functions, risk aversion and also risks considered as a proportion of total assets...
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