Abstract
The second part of this series of articles, representing a preprint of my two-volume book „Behavioral Corporate Finance“, deals with the younger stream of Behavioral Corporate Finance, namely the approach of irrational managers and rational investors, which is discussed in detail in chapter 7 of the book. In particular, this stream analyzes how, in a world with rational investors, irrational managers destroy shareholder value. In this article, this is shown at the example of overconfident managers that make corporate investment decisions. The article presents and analyzes three effects of managerial overconfidence that may lead to value-destroying capital budgeting decisions.
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