Course Outline Subject Name : Instructor : Behavioural Finance Dr. R.K.

Arora

1. Course Description and Objectives: Traditional finance, relying on rational behavior of economic agents, fails to account for many facts about managerial behavior, investor behavior and the aggregate stock market. These facts are best understood using models which assume that economic agents are less than fully rational. Behavioural finance combines behavioural and cognitive psychological theory with traditional finance to provide a better understanding of how people make financial decisions The objective of the course is to apply the concepts of behavioural finance to understand the behavior of the aggregate stock market, individual investor trading behavior, and certain aspects of corporate finance such as capital budgeting, capital structure and dividend policies. 2. Pedagogy: The course is based on the study of existing research in the area of behavioral finance. The course strongly encourages student participation in the classroom. Students will be required to read the assigned research papers and make presentations thereon. A group project also forms part of the course curriculum. 3. Readings a. Text Book There is no required textbook for this course. b. Reference & Additional Readings 1. Shleifer, A., Inefficient Markets: An Introduction to Behavioural Finance, OUP, 2000 2. Montier, J., Behavioural Finance, Wiley, 2002 3. Shefrin, H., Beyond Fear and Greed; Understanding Behavioural Finance and the Psychology of Investing, OUP, 2000 4. Shefrin, H., Behavioural Corporate Finance, McGraw-Hill, 2007 5. Pompian M.M., Behavioral Finance and Wealth Management; John Wiley & Sons
1

4. Evaluation: Student presentations Group Assignment Term-end Examination 40% 30% 30%

5. Contact Details of Instructor R. K. Arora, Professor (Finance), IMI Delhi, Phone No.: 011-47194128 Email: rkarora@imi.edu

6. Detailed Session plan: Session No. 1-5 Topic Readings

Overview of behavioural finance. Application of Behavioural finance to capital budgeting and capital structure decisions.

1. The Theory and Practice of Corporate Finance: Evidence from the field, Graham J.R and C.R. Harvey, Journal of Financial Economics, 61(2001) 2. Testing Trade- off and Pecking Order Predictions about Dividends and Debt, Fama, E.F. and K.R. French, Review of Financial Studies, 2002, 15(1), pp.1-33 3. Testing Static Tradeoff against Pecking Order Models of Capital Structure, Shyam-Sunder, L. and S.C. Myers, Journal of Financial Economics, 1999, 51, 219-244 4. Testing the Pecking Order Theory of Capital Structure, Frank, M.J. and V.K. Goyal, Journal of Financial Economics, 2002

Session No. 6-10

Topic Application of Behavioural finance to

Readings 1.Payout Policy in the 21st Century,

2

dividend and share repurchase decisions

Brav, A. , J.R. Graham, C.R. Harvey and R. Michaely ; Journal of Financial Economics, 2005, 77, pp.483-527 2. Dividends, Share Repurchases and the Substitution Hypothesis, Grullon, G. and R. Michaely, Journal of Finance, 2002 3. Has the Propensity to Pay Declined?, Grullon, G. , B. Paye, S. Underwood and J.P. Weston ; Journal of Financial and Quantitative Analysis, 2011, 46(1), pp.124 4. The Evolving Relation between Earnings, Dividends, and Stock Repurchases, Skinner, D.J., Journal of Financial Economics, 2008, 87, 582-609

11-15

Application of Behavioural finance to investor behaviour

1. Are Investors Reluctant to Realize their Losses?, Odean, T., The Journal of Finance, LIII(5), 1998 2. Do Investors Trade Too Much?, Odean, Terrance (1998), American Economic Review, 89(5), 1279-1298 3. The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence, Shefrin. H. and M. Statman, The Journal of Finance, 1985, XL(3), pp.777-791. 4. Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, Barber, B.M. and T. Odean, The Journal of Finance, 2000, LV(2), pp. 773-806

Session No. 16-20

Topic Application of Behavioural finance to aggregate market behaviour

Readings 1. Can the market add and subtract? Mispricing in tech price care-outs, Lamont, O.A., and R.H. Thaler (2003).Journal of Political Economy 111: 227-268 2. Measuring abnormal performance, do stocks overreact?, Chopra N., J. Lakonishok, and J.R. Ritter, 1992, Journal of Financial Economics, 31, pp. 235-268. 3. Stock price reactions to earnings announcements, Bernard, V.L., in Thaler R. (ed.), Advances in Behavioral Finance, New York: Russell Sage Foundation 4. Momentum, Jegadeesh, N. and S. Titman in Thaler R. (ed.), Advances in Behavioral Finance, New York: Russell Sage Foundation.

7. Group Assignment There is one group assignment carrying weightage of 30%. A group shall not exceed four members. Each group will study in detail one application of behavioural finance to corporate financial decisions, investor behavior or market behavior and produce a report thereon.