Through Mind and Behaviour to Financial Decisions
Vanuit verstand en gedrag naar financiële beslissingen
This thesis contains three (mainly) theoretical essays on the impact of behavioural traits on (corporate) financial decisions. Every essay presents a theory based on mathematical and financial foundations that combines rational theory with behavioural elements. The first study investigates whether CEO overconfidence affects the choice of an acquisition strategy. I develop a continuous time real options model and show that an overconfident CEO is more likely to prefer a direct control acquisition over a toehold strategy; moreover I find empirical support for the theoretical claims. The second study investigates how behavioural theory can explain why sellers choose a particular selling mechanism. I model the choice between a direct auction and a sequential selling mechanism from both a rational and behavioural perspective using auction theory integrated with prospect theory. I find that where rational theory cannot explain the choice for a sequential mechanism and the effect of auction costs, prospect theory can. Furthermore I show theoretically, and confirm empirically, that the expected pay-offs from a direct auction are higher than from an auction after a failed negotiation. The final essay integrates real option theory with prospect theory for discrete investment contexts, where the investment pay-offs are not replicable by traded assets. I find that behavioural traits as optimism or high reference points clearly affect the value of investments and investment decisions, such as timing of exit, within the (compound) real options context. These findings contribute to our understanding of decision processes, and have relevant implications for all corporate financial decision-making individuals.