Irrational Decision-making Of Companies Based On The Theoretical Framework Of Behavioural Finance

Behavioural finance has not yet had a precise definition, however, it combines psychology, anthropology and social science with finance and it is a relatively new research area. The research results in the fields of psychology, anthropology and social sciences are applied to behavioural finance, based on which forms the theoretical system of which the features are how psychological factors affect the parties in the financial activities. Behavioural finance reveals the fundamental flaw: fully rational assumptions of the neo-classical tradition of economics and finance, which makes behavioural finance draw highly attention to a large extent. Different from the standard finance, that market participants of behavioural finance are not fully rational, and they are only quasi-rational or limited rational. They use simple and effective heuristics in the filed of behavioural finance to make decisions, instead of using the Bayes rule. In most cases, these heuristics are effective, however, they usually contain some systematic errors. These kinds of errors will affect the development of the whole process of events in some cases. How do these errors affect the company's decision-making process is the focus of this paper.Behavioural Corporate Finance under Behavioural Finance is a relatively new field of study, so there are not a large amount of domestic researches. Corporate finance focuses on the investment behaviour and financial contracts between the company management and investors, as well as investors and company managers in the process of achieving corporate goals for the financing of the policy, investment policy, dividend policy and acquisition mergers and so on. Therefore, the research about corporate finance will involve with the in the faith, psychological bias and psychological preferences of managers and investors. All along, the research of the company is based on the rationality of financial market, and the theory of rational economic man, by contrast, behavioural Corporate Finance is based on a relatively realistic assumption: from the point of both irrational investors and managers to analyse the company's financing policy, investment policy, dividend policy and mergers and acquisitions and so on. This article is to clarify that how do the irrationality of managers and investors affect the decision-making of a company in the theoretical framework of corporate finance. The whole paper is divided into eight chapters and four parts in all:The first part is the introduction part, which introduces the relevant research background, purpose and meaning of this paper; it also discusses the research methods, content and innovation, and then paves the way for the next chapters. The second part is devoted to the psychological basis, origin and development to behavioural finance, including controversies between standard finance and behavioural finance, two theoretical cornerstones of behavioural finance and three basic theories with the development process of behavioural finance, which generally construct the theoretical framework of behavioural finance; and on this basis explores the theoretical basis of behavioural corporate finance, as well as the performances of managers and investors'mental and behavioural biases. The third part is the focus of this paper, namely discusses the influences of the irrationality of both managers and investors on the company's decision-making, operation and management, including sub-sections of irrational managers and investors in the company affecting the financing policy, investment policy, dividend policy and mergers and acquisitions and so on; and then use a separate chapter to discuss and analyse the herd behaviour. The further study explores that how the herd behaviour affects the company's financing policy, investment policy, dividend policy and the impact of mergers and acquisitions, etc., as well as measures to prevent such herd behaviour occurs. Finally, an example of the market proves the existence of herd behaviour in the market.The last part is the analysis of empirical case study. Three hundred by the Shanghai and Shenzhen stock market data proves that the herd behaviour of listed companies does exist in the market, and finally a summary is made in the chapter of discussion and outlook.