A Study On Executive Overconfidence And Corporate Cash Dividend Policy

The traditional dividend policy theory and related empirical research havedeveloped for more than half a century, while the existing theory system is tested byemerging new puzzles and anomalies, for which no theory could offer a completeexplanation. Especially in our country, due to our specific economic system andcultural background, the “Chinese-style dividend puzzle” has become a hot topic,arousing extensive public attention. With the development of behavior andpsychology and the introduction of human behavior factors into finance, scholarshave been beginning to interpret some anomalies of dividend payout policy frombehavior and psychology of decision maker,which have greatly promoted thedividend theory’s interpretation of reality by putting forward a serious behavior-basedtheory. However, most of these theories have focused on the demand side, that is theirrational dividend investors’ influence on managers and their policy making progress,overlooking the fact that psychological and behavioral deviation from the managersthemselves have directly influenced upon dividend policies, among which executiveoverconfidence is the most significant one. Therefore, it is very necessary to exploredividend policy of Chinese A-share listed firms and its anomalies from psychologicaland behavioral deviation of executive overconfidence.Based on the data from A-share listed firms in Shanghai and Shenzhen StockExchange during the year2007-2011,applying econometrics methods, includingLogistic model,Tobit model and random effect model of panel data, this dissertationfirst analyses dividend policy anomalies of Chinese listed firms, psychology basis ofexecutive overconfidence and the main influencing factors of the executiveoverconfidence, theoretically elaborating the relation between executiveoverconfidence and dividend policy, and then examining the impact of executiveoverconfidence on the company’s cash dividend policy from the two perspectives ofcorporate governance and financing constraints respectively. The dissertation presentsthat overconfidence of executives has a significant negative impact upon thecompany’s cash dividend policy, and different company internal governancemechanism and financing constraint environment can effectively regulate theweakening effect of executive overconfidence behavior towards company’s cashdividend policy. Meanwhile, through the research of the relation among executive overconfidence, dividend variability, abnormal payout of dividend and dividend herdbehavior, the dissertation also finds that decisions of listed companies of existingoverconfident executives on whether to pay dividend have great randomness andparticularly tend to be abnormal low dividend policy, but which also embrace lesserpossibility to take place dividend herd behavior. Dividend herd behavior is therational choice of executives in listed companies.This dissertation suggests that listed companies should fully take into accountthe irrational psychological behavior of executive overconfidence in the process ofcorporate governance and dividend payout decision of listed companies, and adoptingcorresponding measures to rationally guide listed company’s executive, andeffectively avoiding the negative impact of executive overconfidence towardscompany’s dividend decision.