Research On The Effect Of Managerial Overconfidence On Finance And Investment Decision

Since Modigliani and Miller proposed the famous MM theorem, the investment and financing decision-making is always the focus they pay attention on. There are many theories to explain the investment and financing behavior of the corporate, most of them supposed that the managers and investors are the rational policy-maker who max the effectiveness. But many psychological and the economic research already proved that people popularly had the characters of overconfidence and over optimism. So we abandon the hypothesis that the managers are rational, and analyze how the managers effect the enterprises'investment and financial decision.Firstly this paper give the over view of the managerial overconfidence effect on the investment and financial decision, and then we propose our research method. Secondly, we discuss the characters of investment and financial behaviors and the forms reasons in the listing company in our country, and then the influence of the managerial overconfidence on the investment and financial decision is analyzed. Subsequently, chooses the data of the listed companies to the empirical study. At last some policy-type suggestions are given to overcome the bad effect of the managerial overconfidence.We conclude the results of the empirical study as follows:①The managerial overconfidence is positively related to the investment behavior. They invest on some high risky project just for they over estimate their ability.②When the cash flow is abundant, the overconfident managers are inclined to increase the investment. As a result of the proxy problems, the optimistic managers will choose over investment for the free cash flow, and then found their own"the enterprise empire", as a result, many projects with negative NPV will be chose.③The managerial overconfidence is positively related to the capital structure. The overconfident managers overstate the profit capability of the investment plans and underestimate the risk. They believe that the possibility that the enterprises fall into the financial crises is lower than the reality, therefore they favor high level debt financing.④As the managers are overconfident, they are apt to long-time debt when they have to borrow money for outside. The overconfident managers overestimate their own operate capacity and investment plan profit ability; they believe that the earning will be much better than the real return. They thought the cash flow from the interior could redeem the debt, therefore they favors long-term debt. The main works of this paper are organized as follows:①If the managers increase the stocks continuously in three years, and it is not the result of achievement stocks and stock dividends, and the managers are considered as overconfident;②We analyze the managerial overconfidence effect on the investment and financial decision respectively, and establish experience model to exam;③After we know that the managerial overconfidence will generate the over investment, another model is established to check how the unusual investment behavior effect on the financial decision.