Managerial Overconfidence, Investment Behavior And Financial Distress

Modern market economy is a credit economy based on legal system,and capital market is an important part of modern market economy.The development speed and achievements of China's capital market have been remarkable,but in recent years,there have been signs of increasing pressure and risk.Some statistics show that the performance of listed companies is poor in recent years,and some companies' goodwill is greatly impaired and their losses are serious.There are many reasons for this phenomenon,but the law of external factors acting through internal factors is unchanged.Therefore,it can be said that the various business decisions made by the internal management determine the life and death of the company,so the ability and behavior characteristics of the management and the specific content of the business decisions become crucial.In this paper,managerial overconfidence is taken as the starting point to study how managerial psychological bias affects the financial distress of a company through their investment behavior.Confidence is an optimistic and upward attitude with positive significance.From the psychological point of view,confident people have a positive psychological hint,which helps to motivate people to promote things to the expected direction.Subjective efforts tend to greatly improve the probability of success.According to the view of survival of the fittest,confident people have the courage to innovate and dare to accept challenges,so as to increase the chances of success,so they have more competitive advantages for survival.However,when confident people enjoy the joy of success,they are easily confused by victory,immersed in the sense of achievement brought by their confidence,decisive and efficient decision-making,and their self-affirmation cognition is constantly strengthened,eventually forming the psychological deviation of overconfidence.With the in-depth development of behavioral finance,researchers believe that psychological factors will hinder decision makers from acting rationally,resulting in two behavioral barriers to maximize the value of the company in practice.One is inside the company,which is the cost or value loss caused by the mistakes made by managers due to cognitive defects and emotional influence;the other is outside the company,which is from analysts and investors' wrong behavior.The behavior barrier in the company directly affects the decision-making and the consequences of the decision-making implementation,which leads to the transmission path of managerial overconfidence affecting investment decision-making and investment decision-making affecting financial distress.Firstly,in Chapter 2,this paper combs the existing literature from the aspects of managerial overconfidence,financial distress,the influence of managerial overconfidence on investment behavior,and the influence of investment behavior on financial distress.It focuses on the measurement of managerial overconfidence,the influence of managerial overconfidence on financial decision-making,especially on investment decision-making,and the empirical research on the causes of financial distress research.In addition,in order to cooperate with the later test of the hypothesis of mediation effect research,it is necessary to sort out the existing literature related to this issue,and provide the basis for the applicability of the mediation effect analysis method to this study.Chapter 3 mainly studies the relationship between overconfidence of managers and financial distress of companies,and discusses whether overconfidence of managers constitutes one of the causes of financial distress.The empirical test results show that overconfident companies are more likely to fall into financial difficulties than rational companies,and the improvement of profitability,corporate governance and operating ability will help to alleviate the financial difficulties,while investment opportunities and management shareholding will worsen the financial health.For the measure of managerial overconfidence,in the part of robustness test,the paper excludes other potential explanations of managerial increasing stock holdings through empirical analysis,including internal news,historical performance,risk preference and signal transmission,which proves that the method is robust.Chapter 4 studies the mechanism of the relationship between managerial overconfidence and financial distress from the perspective of investment scale.The empirical test results show that: first,when the company is in a more relaxed internal and external financing environment,managers are more likely to over invest than rational companies;but in a worse financing environment,although the cost of obtaining funds is higher,managers are confident that the future high return of investment projects is enough to make up for the financing cost,and the ability of risk control can ensure the realization of high return,so the investment level has not been reduced correspondingly,and there is no significant investment shortage.Secondly,compared with the increase of internal cash flow,when the internal cash flow decreases,the sensitivity of investment to cash flow weakens.That is to say,the decrease of internal cash flow does not lead to the corresponding decrease of investment scale,and the downward adjustment viscosity of investment behavior occurs,resulting in the asymmetric phenomenon of investment cash flow sensitivity,which still exists in the financing constraint environment although it is weakened.Finally,the phenomenon of over investment and the asymmetry of investment cash flow sensitivity play a part of mediated role in the process of managerial overconfidence leading to financial distress.In Chapter 5,from the perspective of diversification,we study the influence of managerial overconfidence on financial distress from the perspective of investment direction.The empirical results show that: first of all,compared with rational managers,overconfident managers are more likely to choose diversification,and the degree of diversification is deeper,which is reflected in the higher probability of overconfident managers choosing diversification,the greater possibility of new revenue sources in the same year,the more number of industries involved in the operation,the smaller HI and the more EI.In general,it shows the expansion desire of overconfident managers.Secondly,compared with single operation,diversified companies are more likely to fall into financial difficulties.The more the number of industries,the smaller the HI and the larger the EI,the higher the probability of falling into financial difficulties.In order to further confirm this conclusion,this paper distinguishes the different periods before and after the implementation of the decision,and proves that the listed companies are more likely to fall into financial difficulties after the implementation of the decision compared with the state before the implementation of diversified decision from the perspective of time series.Thirdly,compared with experienced diversified companies,single operating companies are more likely to fall into financial difficulties after the first diversification.The learning ability from repeated experience is the reason for different diversified behaviors.Fourth,diversification decision-making,especially the one-time diversification of a single company,plays a part of mediated role in the process of managerial overconfidence leading to financial difficulties.Fifthly,the overconfident managers will be in financial difficulties for at least three years after the implementation of diversification decision,while the rational managers will not be in financial difficulties after the implementation of diversification decision.In Chapter 6,I choose the perspective of M&A decision-making to study the impact of managerial overconfidence on financial distress from the perspective of investment behavior.The empirical results show that: first of all,compared with the rational company,the manager overconfident company is more likely to choose M&A activities,and the possibility of continuous M&A is greater,and M&A activities are more frequent.Secondly,overconfident managers are more likely to choose unrelated M&A and cross regional M&A,and they are more likely to choose cash payment and pay higher M&A premium.Further analysis shows that overconfidence managers often ignore the difficulty of resources integration of unrelated M&A transaction and the differences in natural environment,social environment,corporate culture and values associated with cross regional M&A,fail to fully consider the company's internal resources and market environment when determining the payment method,and exaggerate the potential value of the target company when determining the transaction amount and overpay inevitably.Thirdly,managerial overconfidence in M&A is more likely to lead to financial distress.Finally,the partial mediated role of M&A behavior in the relationship between managerial overconfidence and financial distress is significant.Managerial overconfidence indirectly leads companies into financial distress through improper M&A behavior,which is embodied in the mediation effect of unrelated M&A,the mediation effect of cross regional M&A,the mediation effect of improper payment method and the mediation effect of excessive M&A premium.Among them,the mediation effect of improper payment method is mainly reflected in the fact that the company still chooses to pay in cash due to overestimation of the benefits brought by resource integration after merger and acquisition,which leads to the company's financial difficulties.