A Study On Managers' Overconfidence And Corporate Financing Behavior

With the emerging of corporate behavioral finance, the relationship between managers' irrational behavior, especially cognitive bias of overconfidence, and corporate financial decision has becoming a new hot issue. Based on the background of Chinese institution, there are few of studies on the relationship between managers' overconfidence and corporate financing behavior. Therefore, this paper will try to study the following questions: whether managers' cognitive bias of overconfidence exists in Chinese listed companies? How does managers' overconfidence influence corporate financing behavior? Moreover, how does it influence corporate value?Firstly, this paper traces psychology origin of managers' overconfidence, and expounds the inherent relationship between managers' overconfidence and corporate financing. Secondly, the paper analyzes the characteristics of financing behavior of listed companies according to the financing environment of our country. Thirdly, after the indicator is designed to measure managers' overconfidence, this paper researches how overconfident managers choose corporate financing strategy by following the approach of layer-upon-layer, and examines the influences of managers' overconfidence on corporate debt financing strategy and credit financing. The main contributions of this paper are reflected as follows:1. The paper designs the indicator to measure managers' overconfidence based on the listed company earnings forecast system of China. This indicator is more overall and objective and offers analytical tools for related research.2. There are few of empirical studies about the influence of managers' overconfidence on the choice of corporate financing strategies in China. This study shows that not only overconfident managers follow the pecking-order financing theory, but also they are inclined to internal financing and reserve more internal capital through paying less dividend. This conclusion also confirms that managers' overconfidence hypotheses can explain the pecking-order financing theory again.3. From the perspective of managers' overconfidence, the paper uses tax shield kink to examine corporate debt policy according to the popular trend that corporate debt conservatism is common phenomenon. The study shows that debt policy which overconfident managers pursue appears radical tendency. Different from the current literature, this paper is more concerned about corporate performance, and shows that the radical debt policy with overconfident managers will cause the decrease trend of corporate performance.4. How do overconfident managers utilize the effect of credit financing? The scholars have not conducted empirical research on this aspect yet. This study finds that overconfident managers do not prefer credit financing, but it shows that the proportion of credit financing appears a growth trend with the increasing of managers' overconfidence. Comparing overconfident managers' corporation with non-overconfident managers' corporation, this study finds that value-creation effect and growth effect of operating debt leverage are significantly lower in the overconfident managers' corporation.