Behavioural corporate finance

The time-honored doctrine of finance, the so-called efficient market theory, is primarily founded on the basic assumption of individuals acting rationally, i.e. bearing in mind all available information before undertaking an investment decision: in this perspective, corporate finance has developed an organized and consistent set of requirements that, ideally, should enable financial managers to maximize firm value. Why, then, so often in reality things are such different? Behavioral finance constitutes a brand-new approach which, standing at the meeting point between finance and cognitive psychology, seeks to improve the understanding of these phenomena and to explain how emotions and cognitive errors can systematically influence investors ' decision-making process. A consistent number of studies in the field of behavioral finance have attempted to overcome the frequent abnormalities emerging out the classical approach, rooting on the analysis of major behavioral distortions that would lead to sub-optimizing decisions, thus providing valuable contributions to the understanding of market's mechanics. In light of this, the argument in question is to analyze the concept of behavioral finance and behavioral corporate finance, after briefly summarizing the main guidelines of the efficient market theory, to better deepen the reasoning that have been leading many academics to bolster this approach from the early seventies on. In addition, the purpose of this dissertation is to focus on the most usual behavioral distortions that characterize economic organs' conduct in the field of behavioral corporate finance, through discussing typical and recurring cognitive biases, which will subsequently be applied to the major principles and processes of corporate finance, and to financial or investment decisions of business and financial managers, with the aid of mathematical models.