Corporate Governance And Behavioral Finance: From Managerial Biases To Irrational Investors

Corporate governance is concerned about the ways in which investors assure themselves of getting a return on their investment, on one hand, and is focus on motivating managers to increase the company profit, on the other hand (the agency theory). Corporate governance emerges from the interaction between managers and investors. Managers are often more likely to invest the extra cash-flow or profit than to return it to shareholders. But, both managers and investors are lees then fully rational. Sometimes their behavior is based on cognitive psychology. In this context, we are dealing with two problems: managerial biases and irrational investors. Managerial biases focus on the illusion of optimism and overconfidence. Instead, irrational investors can produce overreaction to something and under-reaction to other thing. By this paper we try to emphasize that both managerial biases and irrational investors will affect corporate governance and furthermore will drive to company distress (even bankruptcy) if decisions are more based on cognitive psychology than on rational information.