Managerial Overconfidence, Innovation Investment And Firm Value

With the prospering of behavioral corporate finance, people start to focus on the psychological characteristics of managerial overconfidence and their influence on the firm value as well as the corporate financial decisions. However, it has not reached a conclusion, whether overconfidence would improve the firm value and how overconfidence influenced it. In this article, we analyzed the relationship and influence pattern between overconfidence and firm value, while innovation investment was introduced as a part of corporate investment decision. Qualified companies were selected from the list of manufacturing companies traded in Shanghai and Shenzhen Stock Exchange from2007to2012, whose analysis were made using the multiple linear regression model, in order to determine the influence of managerial overconfidence on the firm value and whether the innovation investment could actually be an influence pattern problem between them.The conclusions are as follows:Firstly, managerial overconfidence had positive influence on the firm value. Secondly, there was a significant positive correlation between managerial overconfidence and the innovation investment, especially companies with high cash flow. Thirdly, the more the innovation investment, the higher the firm value in that year, which exhibited lagging in a short period. Lastly, the innovation resulted from managerial overconfidence, could in turn be transformed into the firm value in the coming one or two years. Thus, it is suggested that firms should rationally treat managerial overconfidence. Set up an effective incentive and restraint mechanism for the managers, to avoid managerial overconfidence bringing bad impact on the firm and strengthen the positive impact.This article broadens the research over overconfidence and firm value, enriches the empirical proof on investment decisions and behavioral corporate finance, which is important both theoretically and practically.