Research On Relationship Between Overconfidence Of Managers And Efficiency Of Investment

In recent years, behavioral finance research shows it’s very common that the interestsof shareholders are damaged because of inefficiency investment, but "principal-agenttheory" and "information asymmetry theory" which are based on rational managers can’texplain why inefficiency investments exist very well. Psychologists and economists findmanagers are not always rational. Overconfidence always exists in the managers. Theresearch methods of qualitative and quantitative are adopted in this paper to definite theoverconfidence and inspect the existence of the listing Corporation management of ourcountry’s overconfidence. What’ more, research is focused on the effects ofoverconfidence on the investment efficiency and effectiveness of various governancemechanisms to provide the basis for the inefficiency investment management of Chineseenterprises.First of all, the related research on Overconfidence and investment are reviewed inthis paper. On the basis of it, overconfidence, inefficiency investment and free cash floware defined, and then the behavior financial theory, investment theory, the principal-agenttheory and information asymmetry theory are summarized.Secondly, inefficiency investment status of our country enterprise is analyzed and theexistence of managers’ confidence is examined by the ways of performance prediction,survey and mergers and acquisitions frequency to reveal that overconfidence iswidespread in our country managers.Again, the substitution variables of overconfident are made and the Richardsonmethod is used to calculate the inefficiency of investment, and then establish the model forempirical test to find the relationship of overconfidence and inefficiency investment andthe control mechanism. The results show that: when the enterprise free cash flow ispositive, firms are more likely to carry on inefficiency investment. Board size haspromoted inefficient investment induced by overconfidence, while debt levels put a curbon it. Independent directors are not significant for the inefficiency investment governanceeffect. Finally, according to the qualitative and quantitative analysis conclusion, the writerproposed to determine a reasonable scale of board of directors, strengthen enterprise freecash flow management, establish management overconfidence evaluation system, improvethe external governance mechanism and so on.