Managerial Overconfidence And Corporate Investment: Experience From Chinese Listed Companies

Corporate investment theory has always been one of the hot topics to academia. Regarding to the investment bias which includes over-investment and under-investment, the Modem Corporate Finance theory gave out its explanations based on Principal-agent Theory and Asymmetric Information Theory. Dating back to 1980s, a new approach to investment bias was introduced. As can be seen from a lot related publications, this new approach was rooted on managers' characteristics, especially, their characteristic of overconfidence. Overconfident managers are reluctant to raise fund through stock market because they have faith in the value of their investment plan as well as the company's stocks. As a result, they will cause over-investment when interior cash flow is sufficient, vice versa.The hypotheses in this dissertation are proposed based on the study of the relevant theories and research findings both from home and abroad. In order to making the research fit into the economic climate where the research samples lay, this dissertation makes adjustments to the measurement of overconfidence and the investment model which using overconfidence as one of its variables. By applying descriptive statistics, correlation analysis and analysis of multiple linear regressions to listed companies in A-Share market of Shanghai Security Exchange ( observation period between 2006 and 2008), this dissertation uses share-holding changes of managers as the measurement of overconfidence and exanimate the relations between managerial overconfidence and corporate investment.According to this empirical research and the comparisons with former ones, this dissertation comes into several conclusions, such as: Managerial overconfidence has no positive correlation with corporate investment ratio, this ratio will drop under average level if no sufficient interior cash flow provided; Companies run by overconfident managers show higher sensitivity to cash flows; Ratio of independent directors has no obvious correlations with managerial overconfidence. Meanwhile, the empirical research reveal the fact that companies run by overconfident managers perform better. In closing, this dissertation proposes several suggestions include: introducing index of managers' characteristics, building stimulation of stock-option, and improving corporate governance.