An Empirical Research On Managerial Overconfidence And Corporate Financial Policies

Financial decision-making is the important content in enterprise management. Traditional finance theory take the rational paradigm of the neo-classical economics as the core reason, the theoretical development and models are implicit assumption of a default, that is the market participants are rational, selfish, and Participation in decision making when the preference always to no way to subjectively estimate the results of decision-making, always seek to maximize the expected value. Traditional corporate finance theory has not considered the psychological and behavioral impact of managers on business decision-making. However, a lot of psychological research confirms that managers common cognitive bias of overconfidence. Managers usually act on a variety of business decision-making, its non-rational cognitive overconfidence bias is bound to affect business investment, financing, mergers and acquisitions and other corporate practices, and impact on enterprise value. Therefore, in considering the characteristics of management overconfidence, the traditional financial theory will lose some of the applicability of theoretical perspectives, but also makes business management and corporate governance theory and mechanisms ineffective. In market conditions, Correct business decision is the key to business success of the enterprise, and vice versa. Corporate decision-making is affected by a certain extent constrained of external conditions, but mainly decided by the behavior of managers in the decision. On the base of the development of new behavioral finance, combined with business management, psychology, sociology and other aspects of the theory, we do a research on the characteristics of self-confidence managers of listed companies and the impact on business decisions, and propose some recommendations of corporate governance on inefficient decision-making.Paper first explores the definition of manager overconfidence, performance and cause, according to the actual conditions of listed companies in China, conduct a statistical analysis of management-related determinants of overconfidence. The results show that the over-confident degree has a negative significant correlation to the age of administrators, and to sex of administrators. Young managers express more over-confident, over-confidence level of older people is lower. China's proportion of female managers is not big, however, between female gender and overconfidence has shown a significant positive correlation. This shows that the female members of our managers is very over-confident, and its degree of over-confidence even more than usually considered biased towards the male members of overconfidence. In addition, the company better track record, the value of Tobin's Q greater corporate managers increasingly confident, the higher the degree of equity balance, the higher the debt level, the higher the proportion of independent directors of the Company of its relatively low level of management confidence.Secondly, the paper constructs manager overconfidence and corporate decision-making model, the theoretical analysis and model derivation, to get the law of managerial overconfidence on the impact of the decision-making. In investment decisions:the managers with overconfidence invest more than managers without overconfidence; over-confident managers evaluate their project and the company's valuation higher than the external market. And capital structure in corporate finance: the enterprises managed by over-confident managers will adopt a higher debt ratio than the ones led by normal managers; overconfident managers are more willing to borrow short-term liabilities of the company and lead to more debt maturity structure short. In other financial decision-making:As managers of over-confident that the high cost of external financing, they tend to internal funds for project investment, reluctant to distribution of cash dividends. Decision-making in mergers and acquisitions: compared to no bias managers, managers of over-confidence will act on more mergers and acquisitions activity.Third, based on finance theory and corporate theory, using behavioral corporate finance theory, we test the relationship between the managerial overconfidence and enterprise investment, and also the infulence of cash flow to this relationship. We take Managerial Ownership Change and the respective ratios of the relative pay as management's proxy for overconfidence, adopts A share in Shanghai and Shenzhen stock listed company data between 2006-2008. Our results show that:managerial Overconfidence significantly affect business investment decisions, existing a significantly positive relationship. Compared to managers with overconfidence, the overconfidence managers more likely to carry out over-investment behavior of enterprises. However, the company's cash flow is not sufficient to enhance self-confidence and business investment managers over the positive relationship between decision-making.Fourth, capital structure and debt maturity structure is an important part of corporate financial decision-making. Using the data of listed company in the Shanghai Stock Exchange and Shenzhen Stock Exchange between 2006-2008, we studies the relationship between managerial overconfidence and financing behavior. Empirical results show that:managers act Overconfidence bias significantly affected the company's debt level. Those enterprises with overconfident implemented more debt financing, the degree of overconfidence managers and corporate debt levels significantly correlated. At the same time, managers Overconfidence significantly affect the debt maturity structure of corporate finance; corporate led by overconfident managers, preference for short-term debt financing, the degree of overconfidence of managers and corporate debt maturity structure significantly correlated.Fifth, the recent wave of mergers and acquisitions continue to emerge in China, M & A took place not only among domestic firms, but also frequent among overseas mergers and acquisitions, M & A amount year by year. Using the data of listed company in the Shanghai Stock Exchange and Shenzhen Stock Exchange between the year 2006-2008, we study the relationship between managerial overconfidence and M & A decision-making. Our results show that:managerial overconfidence significantly affect the M & A decision-making, existing significantly positive correlation between the managerial over-confidence and the corporate mergers and acquisitions, the number of mergers and acquisitions of company with overconfident managers over the number of mergers and acquisitions of company without overconfident managers by 20% about. Listed companies in China M & A occur frequently, and mergers and acquisitions often fail to bring value to the company's upgrade, and even undermining the value of the company. Empirical studies indicate that in China, managerial overconfidence is the major driving force and reason of M & A business.In addition, the research also found that, in general, our business decisions and corporate governance structure does not exist significant correlation. In the current economic restructuring and the specific stage of emerging markets, the governance structure of China listed companies is also not perfect and effective, independent directors have not play a significant role in Decision-making in the listed companies. Independent directors should play a important role in project evaluation, corporate finance, mergers and acquisitions and other corporate decision-making, and also play a more active and effective role in the choice of management, in order to counteract the excessive confidence of the managers. China should gradually improve the market economic system, and continuously improve the systems of various laws and regulations to promote the formation of a truly effective corporate governance structure of the internal and external oversight mechanisms, and constantly enhance the efficiency and competitiveness, protect the interests of business owners and investors.This study provide a new policy proposals for corporate governance of listed companies:Firstly, Overconfidence as a category inherent in the psychological characteristics and behavior patterns, objectively exist in the management of some listed companies. Enterprise decision management, including non-efficient investments, non-efficient financing, non-efficient mergers and acquisitions, the important influence of the non-rational psychology of managers can not be ignored. Secondly, the standard incentive contract manager can not correct the damage to business interests, the company's supervisory incentives need to be adjusted. In agency theory, regardless of the interests of shareholders, managers keen to establish their own business empire. However, the over-confident managers believe that they are loyal to shareholders, and believe that they can maximize shareholder value and enterprise value. Therefore, the focus on incentives to resolve agency conflict can not fundamentally solve the non-efficient management of such acts, The Board need to adopt measures to restrict other constraints overconfidence of managers in deviant behavior, as well as bias caused by such overly aggressive investment, financing and M & A. Thirdly, in the selection of business management talent, business owners and the Board should avoid overconfident persons being taken to into the ranks of corporate managers. Fourthly, changing our existing "An sole extremely large share"ownership structure, enhance the company's shares listed on the extent of checks and balances, to a certain extent, can restricts the behavior of managers over-confidence, increase enterprise efficiency. Fifthly, the independent directors need play a more active and effective role in selecting business management, making corporate investment, financing, mergers and acquisitions, in order to counteract over-confident managers on the impact of business decisions.