| Summary: | Abstract:: This study investigates a firm’s financing, investment, and payout policies through a rational expectation equilibrium based on which managers and outside investors have heterogeneous prior beliefs. The proposed model demonstrates that managers tend to overinvest (underinvest) if the extent of heterogeneousness is above (below) a threshold, which differs under distinct circumstances. Moreover, a price bubble is positively related to overinvestment, and the model shows that a firm’s optimal financing choices and payout policies vary with the assumption of heterogeneous beliefs. Keywords:: Heterogeneous beliefs, Corporate financing, Investment level, Cash dividend, Stock repurchase
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