Corporate Finance

Paper Summary:

The paper examines corporate finance, focusing on the efficient market hypothesis. The paper further examines the behavioural finance school of thought, which argues that any investment decision is a gamble when investors are not fully aware of the future results of their actions. The paper discusses how, due to human psychology, investors often act irrationally, thereby decreasing the market transparency and predictability, together with decreasing market efficiency. The paper concludes that this increases the importance of recent behavioral finance studies, as capital markets are driven by purely human behavior and thus are subject to huge risks.

Outline:
Introduction
Behavioural Finance Approach to Market Efficiency Theory
Conclusion
References

From the Paper:

"Fridson in his work argues that all the investors have their sentiments, or biases when considering risk and making investment decisions. Thus, the risk premium on any asset is the summary of fundamental premium set by efficient investors and of sentiment premium or the investors judgements errors. Also, there are asset prices bubble theories which also prove that in some points of time investors do behave irrationally and overestimate or underestimate factual fundamentals which leads to none fundamental increases in some asset prices followed by further price crash."

Sample of Sources Used:

• Arnold, G. Corporate Financial Management (3rd ed) F.T. Pitman., 2005.
• Benartzi, S., Thaler, R. H. Myopic Loss Aversion and the Equity Premium Puzzle, Quarterly Journal of Economics, February 1995, pp. 73-92.
• Brealey, Myers, Fundamentals of Corporate Finance, 3rd Ed., 2002, McGraw & Hill.
• Fridson, M. A Behavioral Approach to Asset Pricing.
• Gilovich, T., Vallone, R., Tversky, A. The Hot Hand I Basketball: On The Misperception of Random Sequences, Cognitive Psychology, 1985, p. 295-314.

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• Term Paper # 4797 : "Game Theory Applied to Corporate Finance"
• Article Review # 108911 : "Global Corporate Finance"

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