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date: 09 July 2020

Abstract and Keywords

In this chapter, we theorize that corporate governance models in emerging countries, relative to their developed economy peers, countenance greater behavioral biases in financial decision-making. Our arguments start with the notion that officers and directors of a firm choose the types and venues of various financial instruments to fund the firm and design various mechanisms to allocate these funds across divisions and projects within the firm. We posit that these allocation and capital sourcing decisions are influenced by both economic incentives and behavioral biases, which potentially differ between firms in developed and emerging markets. Specifically, we argue that the governance models used in emerging markets facilitate rapid managerial choices but occur at the cost of allowing behavioral-based distortions in both product and financial markets. Building on this notion, we provide insights into financial decisions, behavioral biases, and governance in emerging markets by assimilating behavioral financial economics and models of corporate governance.

Keywords: managerial financial decisions, financial markets, psychological frictions, decision errors, allocation of capital

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