A Study On Manager Overconfidence Impacting On Investment Behavior In Listed Companies

Traditional finance theory has an important assumption, that is "rational economic man" hypothesis, it is to regard decision makers as be rational, seeking to maximize their own interests, but this assumption runs counter to the reality of real life. Empirical experience has shown more and more evidence that traditional financial theory and the classical model have been unable to give a reasonable interpretation of anomalies in capital market,hence, behavioral finance theory was born. Roll (1986) first introduced manager overconfidence in Corporation financial behavior, and then scholars gradually use behavioral finance theory to explain some of the financial decision-making behaviors of the company. In view of the deficiencies and limitations of previous studies, we plan to put Manager overconfidence as a starting point, based on the data of Shanghai and Shenzhen listed companies in 2006-2008, using literature review and empirical tests combination method to explore the impact of manager overconfidence on company's overinvestment behavior, and lead to introduce internal corporate governance mechanism as the main research variables into the model to analyze the internal governance variables and the managers of overconfidence on the combined effect of investment behavior. Through this study ,this hopes can be observed that the in our unique equity institutional arrangement, whether the internal governance mechanisms can ease over-investment behavior caused by manager excessive self-confidence, so give policy recommendations about the internal corporate governance mechanisms of listed companies.The specific contents of the article are as follows: Part I: Introduction This section introduces the research background and motivation of this article, purpose and meaning, content, research methods, research process and the innovation of this paper.Part II: Literature Review This section summarized the literature about the variables relevant to models. First summarized index or methods about measuring manager overconfidence and overinvestment in empirical research of the domestic and foreign scholars, followed by screening and summarizes the relevant literature about company's manager overconfidence on the effect of over-investment behavior, Finally, comb that research outputs about corporate overinvestment introducing in corporate governance.Part III: Theoretical Analysis and assumptions This part firstly gives an interpretation of manager irrational behavior expression. Also lists the conceptual framework map, and start theoretical analysis and then propose hypotheses.Part IV: Research Design Based on theoretical analysis ,this article designs this empirical research model ,introducing the manager overconfidence, over-investment level,interact about manager overconfidence within corporate governance mechanism, company size, earnings per share and other variables, and using data of the three years of 2006-2008, all industries (excluding finance and insurance type) and the Shanghai and Shenzhen A-share listed companies to start empirical research .Part V: Empirical Analysis This section is the statistical analysis result of the empirical model checking .In this paper, we carried out descriptive statistics, correlation and multivariate statistical analysis of model 2 - model 6, combined with our capital markets, equity arrangements background to explain the results of research hypotheses.Through this research, this paper gives the main results as follows:1. Overconfidence is a subjective feeling, it will affect people's behavior policy. As a business decision makers, manager's psychological characteristics often had a profound impact on the enterprise's success or failure. For managers, the appropriate self-confidence can play an invaluable role, bringing in the glory and the success for the company. However, overconfidence will damage the value of enterprises, and even bring disaster for the enterprise. For example, over-confident managers will tend to over-investment, and such non-effective investment will reduce the value of the company finally.2. Overconfident managers have internal financing preference, they prefer the company's internal cash flow, because they think the higher cost of equity financing, and the dilution of shareholding, while the debt financing not only to accept the many limitations of creditors, but also bear higher financing risk. Therefore, they will be more willing to use its own internal cash flow for investments, there is management opportunism to them.When the enterprise cash flow is ample, it would increase their investment desires, triggering over-investment, which shows that they have investment cash flow sensitivity.3. Based on 2006-2008 data from listed companies in Shanghai and Shenzhen in China, internal corporate governance mechanisms played a different level of investment behavior effects and role to over-investment behavior triggered by excessive overconfidence. In the binding mechanism, due to the special equity nature and institutional arrangements, "absence of owner" phenomenon and "internal control" phenomenon is quite serious, this made it easier for the over-investment behavior of overconfidence managers . Therefore, in our listed companies , the higher the shareholding proportion of large shareholders, over-investment phenomenon caused by excessive overconfidence is more serious. Expanding the scale of board of directors will lead to working inefficiencies, which affected the overseeing and binding function of Board of Directors to managers. In addition to those two jobs-one of the managers, if there is the emotional characteristics of excessive self-confidence, then it may be infected with other homologous members of the Board, form a powerful voice to eventually lead to higher enterprise over-investment level. Therefore, the larger the board, but strengthen the over-investment behavior because of manager over-confident. In the incentive mechanism, manager shareholding and the size of executive pay did not ease the expected effect of over-investment behavior. The former is due to our equity incentive plan has just started, relative backward than abroad, the holding share of managers equity is not very high, and this mechanism can not stopped excessive investment caused by manager's subjective psychological and emotional .While the latter is due to the higher pay, can cause managers confidence expansion, thereby increasing the over-investment.Innovation of this paper is to firstly take the interaction of corporate governance variables and overconfidence into the model to study that role played on corporate investment behavior which corporate governance mechanisms based on the financial behavior framework. This study illustrates the agency problems, information asymmetric and manager overconfidence are important incentives for excessive investment in business, but the former two are based on the framework of traditional theory, but overconfidence is a Behavioral Finance perspective incentives. In traditional theory, improving the corporate governance is commonly used to solve the agent problem, but we say that this role can also be obtained in the behavioral finance theory.Therefore, this article introduced the interaction of corporate governance and manager overconfidence as the main research variable into the model to examine the role played which corporate internal governance mechanism on over-investment phenomenon caused by manager overconfidence.