Irrational Markets, Managerial Biases and Corporate Finance

A review of capital markets in China

Authored by: Guiru Hua , Huanda Shi

The Routledge Companion to Accounting in China

Print publication date:  September  2018
Online publication date:  September  2018

Print ISBN: 9781138678538
eBook ISBN: 9781315558899
Adobe ISBN:

10.4324/9781315558899-3

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Abstract

As the enterprise managers frequently display the psychological characteristics which deviate with the most superior decision-making, recent research in behavioral corporate finance starts to replace the traditional rationality assumptions with behavioral foundations that are more evidence-driven (Baker and Wurgler, 2013). The realization of efficient markets requires the effective operation of a complete set of macro and micro mechanisms. Although the stock market has seen huge changes since the establishment of the Shanghai and Shenzhen Exchanges in 1990, restrictions on short sales has led to imperfect arbitrage due to a lack of efficient market mechanisms, misguided regulation and poor law enforcement. The empirical studies have found evidence supporting the notion that stock market in China is inefficient or weak-form efficient. In addition, due to Confucian culture and lack of effective external monitoring and disciplining mechanisms, the enterprise managers possess almost the absolute power and authority and are likely to be more overconfident and irrational than their peers in other countries. Thus, emerging markets in China provide unique settings to investigate the impact of inefficient market and managerial biases on corporate finance. In this chapter, we discuss related literature on the effect of irrational markets on corporate finance, managerial biases and the relevant effects on corporate decisions.

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