The Empirical Study On The Relationship Between Managerial Overconfidence And Overinvestment

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 some companies always have different levels of inefficient investment. General theory suggest that many factors can cause inefficient investment, such as decision-makers lack of knowledge and ability, decision-makers failed to fully grasp the market information, changes in market environment and decision-makers’self-interest behavior, but 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, the managerial psychological factors must be considered, especially managers’overconfidence psychological factors.This paper is based on behavioral finance theory, adopting2008-2011manufacturing companies’financial data to do empirical studies. On the basis of discussion of the relationship between managerial overconfidence and company’s overinvestment, this paper further to analyze the state-owned listed companies and the private listed companies. This paper improves the current contents of behavioral finance theory, provides explains on company’s overinvestment 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) The overinvestment-cash flow sensitivity of companies with overconfidence managers are higher.(3) Compared with the private listed companies, the overinvestment of the state-owned listed companies with overconfidence managers are higher.(4) Compared with the private listed companies, the overinvestment-cash flow sensitivity of the state-owned listed companies with overconfidence managers are higher.(5) The introduction of corporate governance in the power structure^independent director system and managerial ownership has some differences to govern the companies’overinvestment in two different nature of the company. The chairman of the state-owned listed company, who holds the position of general manager, will increase the overinvestment, but didn’t not passed the significance test, and the chairman of the private listed company, who holds the position of general manager, will significantly increase the overinvestment. Independent director system of the state-owned listed company can significantly reduce the overinvestment, and independent director system of private listed companies will increase the overinvestment, but didn’t pass the significance test. Managerial ownership of the state-owned listed companies can reduce the overinvestment, but didn’t pass the significance test, and managerial ownership of the private listed companies can significantly reduce overinvestment.(6) Different managerial overconfidence level will bring different degree of company’s overinvestment. When the manager has overconfidence, over-investment in the company’s significant focus on manager who is men, younger age, higher education level, shorter working features, higher horizontal social capital, higher longitudinal social capital and the situation is more serious when company’s free cash flow is positive.At the ending of this paper, through the pre-conclusions, we give several advices on promoting efficient investment and put up some recommendations to selecte、inspire、supervise company’s manager.