Research On Managerial Overconfidence And Over-investment Behavior In Listed Companies

The investment behavior of enterprises is an important value-creating activity, and it is an important factor in promoting business growth, so it has always been the focus that the community pays close attention to. There are two representative viewpoints in this field:one is the theory of financing constraints; the other is free cash flow agency theory. These theories were based on the traditional financial theory that assumed that the people were "rational". However, men are not completely rational, and commonly have some irrational psychological characteristics in the practical life. And among them overconfidence is relatively stable psychological characteristic. Then some scholars got rid of this limit, and took human psychological characteristics into account in the financial field, such as overconfidence, and founded behavioral finance theory. Behavior financial theory assumes that people are not completely rational in the realistic economic activities, and some of their psychological behavior characteristics will have an impact on enterprise’s investment behavior. The strict hypothesis that person is rational is gave up in this paper. And from this part, we try to discuss how managerial overconfidence makes an effect on the investment.Based on the summary about the relationship between irrational behavior and investment behavior at home and abroad, we find managers often show the irrational psychology characteristics—overconfidence. And it has an effect on the companies’ investment efficiency, especially, when the companies have enough cash it will have much more influence on inefficient investment. Then based on the analysis about the behavioral theory and the agency theory, we put forward three hypotheses which is the questions that we will answer in the paper. Therefore, we use listed companies’ the financial data between 2008 and 2010 as the sample to make empirical analysis. Based on behavioral finance theory in this paper, firstly, we study how managerial overconfidence makes an effect on the over-investment; secondly, we study how managerial overconfidence makes an effect on the over-investment when they have enough cash flow; thirdly, we study how managerial overconfidence in different ultimate property enterprises makes an effect on the over-investment when they have enough cash flow.Last, we design variables, set up models and make a comment about empirical analysis results of regression model. And we draw the following conclusions:The first, the overconfident managers of listed companies in our country likely give rise to over-investment. Overconfident managers often overestimate the expected earnings in future and underestimate risk, and continually expand the scale of investment, lead to excessive investment. The second, if the overconfident managers have enough cash flow, they will cause more severe excessive investment. If there is enough cash flow, overconfident managers will be not reasonable to expand investment using the company’s idle funds, as a result, leading to over-investment. The third, if cash flow is abundant, overconfident managers in state-owned enterprises will aggravate enterprise excessive investment than non-state-owned enterprises more. There are many differences between non-state-owned enterprises and state-owned, which makes overconfident managers have different effects on over-investment.According to the empirical analysis conclusions in this paper, making the following recommendations:To strengthen the enterprise internal supervision and the incentive mechanism of construction, and consummate the system of independent directors of the whole enterprise, which restrain the overconfident managers’ irrational behavior; to strengthen and improve the level of internal capital management, and reduce the problems of the fund abuse and try to avoid the enterprise internal cash flow fluctuations; to rationalize the agency relationship about property right of state-owned enterprises; to perfect the state-owned enterprise’ internal management mechanism and reduce investment behavior distortion for "insider control" or "short-term opportunism".