FNCE 239 Lecture Notes - Lecture 19: Market Timing, Capital Structure, Behavioral Economics
21 Apr 2016
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Document Summary
We have seen that the average investor is prone to cognitive biases and systematic deviations from rationality i. e. bayesian updating of beliefs or expected utility maximization. We have observed individual investor behavior to be correlated when aggregated at the level of individual securities. Rational arbitrageurs are typically constrained in their ability to act against mispricing, even if appears profitable. That is, rational arbitrageurs typically do not act on arbitrage opportunities. Rational managers in the presence of irrational investors. Catering: dividends, name changes o o o o o o o o o o. In efficient markets, market timing is not possible, and m&m holds. This is closely related to the modigliani & miller theorem that the market value of a company is independent of its capital structure. Firm value is determined by real asset and growth opportunities, not by security choice. The total amount of pizza is unaffected by how it is sliced.
