Effect Of Overconfidence Manager To Enterprise Investment Decision From The Perspective Of Cash Flow

Since Modigliani and Miller proposed the famous MM theorem on a series ofassumptions, scholars have been concerned the investment decision of enterprises.There are many theories to explain the investment decision, but most studies assumethat managers and investors are rational decision to maximize utility. Psychology andeconomics research in recent years shows that overconfidence bounded rationality ischaracterized by a general and universal. This paper gave up the rational decisionmaker of traditional financial theory hypothesis; managers establish overconfidenceand the company’s investment decision-making relationship model, as the basis forfull argument from both theoretical and empirical aspects of overconfidence based oncash flow perspective manager’s impact on investment decisions.In this paper, we studied on a combination of research methods of empiricaltesting and regulatory studies. We build a theoretical framework, and the first round isthe relationship between the manager’s overconfidence and the investmentdecision-making, then we select the financial data of listed companies in China inrecent years, and empirical test the manager’s overconfidence on corporate investmentdecisions, finally we summed up the conclusion of this paper, and given somerecommendations on how to improve the impact of the managerial overconfidence oncorporate investment policy. Overall, the analytical framework in this paper includedthe comparative normative, logical reasoning, explanatory and descriptive empiricalresearch.Through empirical research, we draws the following conclusions: first, in viewof the occupation reputation and the long-term self-interest, because of the relativelyhigh salary, overconfident managers have more cautious on the investment decision,means that China’s salary incentive system plays a certain role in the incentive.Second, overconfidence managers are inclined to internal finance; overconfidencemanagers have higher investment-free cash flow sensitivity. Third, enterprisessufficient cash flow can strengthen the positive correlation between managerialoverconfidence and corporate investment decisions.