Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212452 
Year of Publication: 
2019
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 18/2019
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Overconfidence and overextrapolation are two behavioral biases that are pervasive in human thinking. A long line of research documents that such biases influence business decisions by distorting managers' expected productivity. We propose a new mechanism in which the biases change firms' precautionary motives when external financing is costly, finding that the influences of biases on investment, payouts, and refinancing are stronger for financially weaker firms. Moreover, biased and rational firms display di erential responses to economic booms and busts holding financial positions constant. Our work illustrates that managerial traits, when interacting with imperfect capital markets, drive firm dynamics in business cycles.
JEL: 
E32
G31
G32
G35
G41
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-293-8
Document Type: 
Working Paper

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