Research On The Influence Of Managerial Overconfidence On Corporate Financial Decisions

Financial decision plays an important role in the activity of enterprise value creation. It not only determines the enterprise asset allocation, thus affecting enterprise cash flow, but also determines the source of capital and the costs of capital. Financial decisions that are scientific and reasonable can promote enterprise development smoothly and increase enterprise value, Conversely, it will retard enterprise development, and do harm to enterprise value.Since 1950s, many scholars have investigated the financial decisions, and have got some outstanding achievements, for example, capital structure theory, capital asset pricing model, dividend policy theory, enterprise investment theory etc. These theories make people deepen the understanding of financial decisions and provide guidance for financial decision scientifically. However, standard financial theory, which draws lessons from the research paradigm of mainstream economics, namely the hypothesis that man is rational, regards people as a completely rational man, thinks that people can process all the information correctly, make unbiased estimation for the future, and make decisions according to utility maximization. It pays no attention to the impacts that the person's mood, emotion and cognitive biases have on decisions. However, in real life, people is not completely rational, but limited rational. People do not make decisions according to utility maximization, but according to prospect theory. Because traditional financial theory ignores the influence of human behavior in decision-making process, some of financial phenomena in the real world (such as the sensitivity of enterprise investment to cash flow, the merge that is harm to enterprise value) can't be explained scientifically and reasonably, thus resulting in the rise of the theory of behavioral corporate finance. So-called behavioral corporate finance, which combines psychological achievements with corporate finance, explores the impact that people's psychological characteristics and emotion have to the enterprise financial decisions-making.Since 21st century, western scholars, especially American scholars, have made an in-depth research on behavioral corporate finance, and gained an important achievements about the relationship between managerial overconfidence and enterprise financial decision. However, as far as China is concerned, the research in this aspect is still in the initial stage, it needs further research.Firstly, starting from the relevant theories of financial decision, after making an analysis about traditional financial decision theory, research framework of behavioral corporate finance and the literature about the effect of managerial overconfidence on financial decision-making, this paper explores the overconfidence theory from the angle of psychology and behavioral corporate finance.Then based on the relevant literatures from domestic and foreign, this paper analyzes the mechanism that managerial overconfidence affects financial decision-making theoretically, and according to the relevant data of Chinese listed companies, makes an empirical analysis about the relationship between manageral overconfidence and financial decision-making. In the end, the paper makes an analysis about the effect of overconfidence in detail, and puts forward countmeasures to utilize and restrain managerial overconfidence. This research, which enrichs the theory of behavioral corporate finance, has an important guiding significance to improve corporate governance, set up decision-making mechanism and ehhance financial decision-making scientificly.The main conclusions are as follows:(1) Overconfidence, as a kind of psychological characteristics that is robust, is more so for managers. Because overconfident managers, who overestimate his ability, knowledge and information, usually makes the decision that often do harm to enterprise value, we should take various measures to reduce managerial overconfidence in decision-making process.(2) Overconfident managers have a great impact on investment decision-making. In project evaluation, overconfident managers often overestimate the cash flows of project and underestimate the risk of it, so they exaggerate the investment value of project, and have an impulse of excessive investment.(3) Overconfident managers often lead to the non-optimization of capital structure. Overconfident managers overvalue enterprise's profitability, and underestimate the possibility of corporate financial distress, therefore, they often use more debt in financing decision, resulting in deviation from the best capital structure.(4) Overconfident managers always don't distribute cash dividend. Overconfident managers overestimate the growth of enterprises, and think that the company is undervalued, thus in order to meet the needs of business growth, they often raise capital in the form of retained earnings, which leads to the result that companies won't pay cash dividends and pay less cash dividends.(5) The wish that overconfident managers conduct M&A is always high. In conducting mergers and acquisitions, overconfident managers overestimate their leadership and management ability, and overvalue the target company's value and merger's synergies, therefore, they often have higher tendency to conduct M & A. The main contribution of this paper are in the following aspects:(1) It relaxes the assumption that managers are rational in the study of corporate financial decisions. On the basis of behavioral corporate finance theory, according to the datas of listed companies in China, the paper makes a theoretical and empirical analysis about the mechanism that managerial overconfidence affects decision-making. (2) At present, few scholars examine the effect that managerial overconfidence has on corporate R & D investment, the paper makes an empirical analysis about the relationship between managerial overconfidence and R & D investmente, and finds that compared with rational manager, overconfident managers are more willing to conduct R & D investment.(3) There is little literature about the relationship between manageral overconfidence and company's dividend. Based on the angle of internal financing, the paper explores the mechnism how overconfident managers affect dividend distribution theoretically, and draws the conclusion that overconfident managers are more willing to raise capital from retained profit, and do not willing to pay cash dividends. The above conclusion is confirmed by empirical research.(4) The paper examines the effect that corporate governance such as board independence has on overconfident managers, and finds that the improvement of board independence can restrict overconfident behavior, which provides specific measures and means to control managers' irrational behavior.