Study On The Relationship Between Managerial Overconfidence, Financial Decision Behaviour And Listed Company Performance

Managerial overconfidence and non-rational financial decisions are an important research topic in the field of behavioral corporate finance. On one hand, some successful companies fell into deep crisis for managerial overconfidence leads them to make non-rational financial decisions, such as Sichuan Changhong, Sanjiu Group and Sunco China. On the other hand, many top managers properly assess their own ability and corporate power, and then make rational financial decisions according to the context, which leads their companies to grow up rapidly, such as Wanxiang Group, Huawei Technology, Gree Group and Midea Group. The success or failure of these companies supply with important theoretical value and practical guidance, and have aroused people's widespread concern and discussion. However, after more than 30 years, most of the literatures in the field of behavioral corporate finance focus on the non-rational financial decisions of investors, the literatures on the non-rational financial decisions of corporate managers are relatively rare. In fact, as an emerging research topic, the researches on managerial overconfidence and corporate financial decisions which using domestic companies as sample are extremely rare.Based on the above, this paper comparatively analyses four typical cases, and then indicates several key propositions that need in-depth study. They are as follows:(1) how will managerial overconfidence influence on corporate financial decisions? As corporate financial decisions can affect corporate performance, will the performance of companies with overconfident and non-overconfident managers be significantly different? (2) Will the impact of chairman overconfidence and TMT overconfidence on corporate financial decision be significantly different? (3) How to accurately define and measure managerial overconfidence? (4) Are the effects of different background characteristics such as regional culture, gender, education and age on the degree of managerial confidence unlike?According to the above propositions, this paper systematically reviews the relevant literatures on managerial background characteristics, managerial overconfidence, corporate financial decisions and corporate performance, and then deductively analyses the intrinsic link between these variables combining with Chinese cultural context and management practices. After that, this paper puts forward several hypothesizes and a theoretical model, and then uses the date of Chinese listed companies in 2005-2008 to conduct an empirical test. This paper reaches the following conclusions: (1) The cultural background and age of chairman have significant influence on chairman overconfidence.The empirical results show that the chairman from the coastal areas are more likely to exhibit overconfidence compared to chairman from the inland areas. This infers that coastal culture can easier induce corporate managers to be overconfidence, relative to inland culture. In addition, older chairman is less likely to exhibit overconfidence. This infers that old chairman can make form an objective and proper perception of his/her own ability and corporate financial decisions, and then exhibit moderate confidence.(2) Managerial overconfidence can affect corporate performance through corporate financial decisions.The results of empirical test show that managerial overconfidence has a positive and significant influence on corporate investment expenditure, merger and acquisition, the ratio of leverage and cash dividend payment, and these corporate financial decisions (except cash dividend payment) have negative and significant influence on corporate performance. Moreover, compared to the performance of companies with normal managers, that of companies with overconfident managers is significantly lower. That is to say, managerial overconfidence can indirectly influence corporate performance through the role of corporate financial decisions.(3) Compared to TMT overconfidence, chairman overconfidence can better explain the non-rational financial decisions and corporate performance.The results of comparative study show that chairman overconfidence significantly influences all corporate financial decisions such as investment expenditure, merger and acquisition, the ratio of leverage and cash dividend payment; however, TMT overconfidence only significantly influences corporate investment expenditure and financing decisions. Overall, relative to TMT overconfidence, chairman overconfidence can better explain the non-rational financial decisions and corporate performance. This infers that in Chinese listed companies, chairman has an important influence on corporate decisions.To sum up, this paper contributes to the improvement of theoretical research in the field of managerial overconfidence in three ways:(1) This paper systematically builds up a theoretical model on the relationship between managerial overconfidence, corporate financial decisions and corporate performance, and empirically tests their interactive influences.(2) From the respective of top echelon theory, this paper empirically studies the impact of background characteristics of managers on their overconfidence. It finds that coastal culture and inland culture have different and significant impact on managerial overconfidence. (3) Combing with Chinese cultural context, this paper verifies that chairman overconfidence can better explain corporate financial decisions and corporate performance, compared to TMT overconfidence.In the end, this paper proposes several policy advices for Chinese companies with hope of helping them overcome the negative effects of managerial overconfidence, then points out the limitedness of this paper.