Rational Corporations in Irrational Markets

Abstract

In this chapter, it is assumed that corporate managers behave in a fully rational manner and attempt to take advantage of investors’ irrationality and temporary market anomalies. We investigate how investor biases and market inefficiency may impact financial and investment policy of corporations. In the area of financial decisions, we study equity offerings, stock repurchases, debt issues and asset exchange offers, and dividend policy. In regard to investment choices, we investigate real investment, mergers and acquisitions, decisions to enter a new market, and the choice between focus or diversity in business operations. We also look at earnings management, adjusting nominal share price, changing firm names, and other managerial practices targeted at market timing, catering to investor tastes, and exploiting market inefficiencies.