Manager�s Irrational Behavior in Corporate Capital Investment Decision-Making

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Author	Xijuan Shao, Lixin Wang
ISSN	2225-7217
On Pages	183-193
Volume No.	2
Issue No.	2
Issue Date	May 01, 2020
Publishing Date	May 01, 2020
Keywords	Manager�s Irrational Behavior; Corporate Capital Investment Decision-making; Behavioral decision-making

Abstract

The purpose of this paper is to explore manager�s irrational behavior and reasons for it in corporate capital investment decision-making. The authors present the approach to discovering manager�s irrational behavior in corporate capital investment decision-making; classify the irrational behavior by the steps in decision-making; propose hypotheses on reasons for each irrational behavior; conduct empirical test through hypothesis testing and questionnaires; summarize the real reasons for each irrational behavior according to the empirical results. Findings- When estimating cash flow, managers will use heuristics for lack of clear frame of mind. Therefore, cognitive bias and psychological factors take place in heuristics. The main reason causing irrational behavior in the determination of discounted rate is the deficiency in financial literacy. Since most managers are confused with the concept of cost of capital, method of risk management and models of discounted rate, cognitive bias and psychological factors function in this step. When selecting indicators, managers present irrational behavior because of psychological factors but cognitive bias.

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