Study On Impact Of Policy Maker's Overconfidence On Corporation Profitability For Chinese Listed Companies

This paper reviews domestic and overseas literatures on corporation profitability, behavior finance, overconfidence and then studies the impact of policy maker overconfidence on corporation profitability for the Chinese listed companies with theoretical and empirical analysis.The theoretical analysis finds that the negative effect of policy maker overconfidence on corporation profitability in Chinese listed companies works depending on corporation investment and financing policy. Overconfident policy makers tend to invest excessively. The investment amount they chose is not the optimum one, which can maximize the real net present value in investment. Therefore, overconfident policy makers likely invest a project which has negative real net present value in investment. Furthermore, overconfident policy makers in Chinese listed companies are prone to equity financing and the more they are overconfident the more they adopt equity financing actively. The policy maker overconfidence presented in investment and financing decision will affect corporation profitability.This paper designs two methods to weigh the policy maker overconfidence in Chinese listed companies using Industry Climate Index and listed companies'profit announcements. It also introduces the principle component analysis to get the synthesized profitability index from sales net profit rate, ROI, ROE, CROA, EPS and return rate in stock market. The empirical analysis finds that there is a stably strongly negative correlation between policy maker overconfidence and corporation profitability in Chinese listed companies.This paper also analyzes the effect discrepancies of policy maker confidence on corporation profitability between different Chinese listed companies after classifying them respectively by stock proportion of the first large shareholder,industry and monopolization power. The conclusion is:(1) Differences between the effect in companies controlled by the first large shareholder and the effect in companies not controlled by the first large shareholder cannot be testified. (2)The effect in manufacture companies is weaker than the effect in non-manufacture companies. (3) The effect in monopoly companies is weaker than the effect in non-monopoly companies. (4) There is a strongly negative correlation between policy maker overconfidence and corporation profitability in every classified company.