An Empirical Study On The Relationship Between Managerial Overconfidence And Corporate Overinvest Behavior

Investment activities play an important role on the company’s growth and future cash flow growth. Manager’s investment behavior is right or not will directly impact the value of the company. But in reality there are many companies have different levels of investment distortions. General theory suggest that many factors can cause this distortions in investment, such as decision-makers failed to fully grasp the market information, decision-makers lack of knowledge and ability, or changes in market environment, manager’s psychological factors was not included. In fact, managers are not always rational when making investment decisions, the psychological factors also influence the results of their decision-making activities. This requires that when we study the investment decision-making, behavioral finance, the manager’s psychological factors must be considered.This paper is based on behavioral finance theory, adopting2007-2009manufacturing companies’financial data, and do empirical studies to discuss the relationship between managerial overconfidence and company’s overinvestment. This paper improve the current contents of behavioral finance theory, provide explains on company’s over-investment from the behavior corporate finance, and has targeted a number of recommendations to guide the company’s practice investment.By empirical studies, the result was that:(1)The overconfidence level of managers are related to the level of the company’s overinvestment.(2)Compared with other companies, the overinvestment-cash flow sensitivity of companies with overconfidence managers are higher.(3) Different managerial overconfidence level will bring different degree of company’s over-investment. When the manager overconfidence, over-investment in the company’s significant focus on manager who is men, younger age, shorter working features, and the situation is more serious when company’s free cash flow is positive.(4)The introduction of corporate governance in the independent director system, managerial ownership can reduce the investment behavior. Overinvestment behavior of corporate have also been effectively controlled in these higher rate of assets and liabilities company, because of the financial constraints.