Survey evidence indicates that dilution and market timing are the top factors that influence financial executives’ decisions about issuing new equity. The top factor influencing financial executives’ decisions about new debt is financial flexibility. As a group, financial executives also report that they attempt to target values for their firms’ debt-to-equity ratios.

The behavioral APV approach to capital structure features errors and biases by managers, the market, or both. Managers who perceive that the securities of their firm are mispriced will be prone to engage in market timing. Such activity will be tempered by the extent to which the firm is financially constrained, its growth opportunities, and the sensitivity of its market price to new issues or repurchases.

Excessively optimistic, overconfident managers of cash-poor firms are prone to reject positive NPV projects because they overvalue the equity of their firms. Excessively optimistic, overconfident managers of cash-rich firms are prone to adopt negative NPV projects because they overvalue the cashflows from those projects.

Two indicators of CEO overconfidence involve press coverage and options exercise behavior. The behavioral approach to capital structure suggests that firms with excessively optimistic, overconfident managers feature investment policies that exhibit excess sensitivity to cash flows. Empirical work shows that firms with longholder CEOs have investment policies that are excessively sensitive to cash flows.