Behavioral Corporate Finance

Traditional corporate finance assumes rational managers and efficient markets. Behavioral Corporate Finance integrates psychology to explain systematic departures from that ideal. This chapter synthesizes how heuristics, cognitive biases, and framing effects shape corporate decisions, policies and outcomes across valuation and capital budgeting, perceptions of risk-return, market efficiency and anomalies, capital structure, payout policy, agency and governance, group processes, and mergers & acquisitions. We organize evidence on how these behavioral issues distort cash flow forecasts, discount rate selection, financing choices, dividend and buyback decisions, and acquisition premia, and how limits to arbitrage allow mispricing to persist. The chapter distinguishes behavioral costs from classic agency costs, reviews empirical regularities (e.g., reversals and momentum, post earnings announcement drift, IPO underpricing, market timing), and draws practical implications for CFOs and boards. We propose a debiasing toolkit – decision process design (pre mortems, checklists, reframing, risk adjusted hurdle rates), governance and incentive redesign, and a “behavioral APV” lens that incorporates perceived mispricing – to improve capital allocation and long term value creation. By integrating behavioral evidence with normative finance tools, the chapter offers an actionable framework for recognizing, measuring, and mitigating behavioral frictions in corporate decision making.