Corporate Finance: Behavioural Foundations A Touch of Responsible Investments and Behavioral Economics

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Today’s business environment is more complicated than ever. This is illustrated by the recent financial crisis and its aftermath and emerging topics like climate change and corporate social responsibility increasingly affecting corporate decision making. The field of corporate finance deals with the financing and investment decisions made by the management of companies in the pursuit of shareholder wealth maximization and dealing with the preferences of other stakeholders. This course gives a broad overview of important issues in corporate finance and combines insights from (behavioral) economics and finance. The economic side of corporate finance deals with the maximization of shareholder wealth. Managers aim at securing the greatest possible return in exchange for accepting the smallest amount of risk. For instance, a company can finance itself by borrowing money from banks, by issuing bonds or through issuing equity at the stock market. These types of decisions influence the expected return and risk of the company. Traditional economics assumes that managers and investors are rational, self-interested people. However, there is a large body of evidence from social psychology and behavioral economics that people often act irrationally and behave pro-socially by taking the social impact of (investment) decisions into account. This course also shows how decision making biases managers and investors in their financial decisions and how social preferences of shareholders and stakeholders impact corporate social responsibility. Investors in both equity and debt claims of these companies have (heterogeneous) social preferences. Increasingly, large institutional asset owners such as public pension funds exert pressure on the management of companies with the purpose to increase the governance quality, and the environmental and social performance of their investments. The course is largely based on real-life cases that we discuss in an interactive manner during tutorial groups. Students will debate on topics such as "What amount of risk should companies take?" and "Is it important for firms to put corporate social responsibility high on their agenda?".