Study On The Relationship Among Managerial Overconfidence, Investment Efficiency And Firm Values

With the separation of ownership and management to the modern enterprises,managers play more and more important role in daily operative activity. Traditionaltheory regards managers as the “rational-economic men” and believes they makedecisions according to the principle of self-interest, thus there comes agencyrelationship. On the basis of Principal-agent Theory, managers may give up someinvestment projects that could maximize shareholder value due to risk aversion, orinvest those with a negative NPV to build their own empire. All of these will damageenterprise value. Since1980s, the development of behavioral finance theorychallenges traditional theory. Researchers find that humans are not completelyrational. We have many psychological biases and overconfidence is common.Current research indicates that managerial overconfidence affects the decisionand efficiency of investment in corporation greatly. Overconfident managersoverestimate the benefits of investment projects，so they accept investment projectsearlier, and even leads to over-invest. Some scholars also find that overconfidentmanagers appear significantly greater investment-cash flow sensitivity. Theyoverestimate the cost of external financing. So when cash flow is insufficient,underinvestment will happen. Moreover, these studies have implied that investmentdecisions made by overconfident managers do harm to the company’s value. While,some scholars raise doubt to it and argue that overconfidence has certain positivesignificance. To some extent, managerial overconfidence can reduce theunder-investment and improve the enterprise value (Goel&Thakor,2008). Relative tothe rational managers, the studies on how overconfident managers’ decision-making impacts the company are lagging and their conclusion remains controversy and rifts.On the basis of reviewing the available literature, this paper, with the positiveresearch method, analyzed how managerial overconfidence impacts the value offirms, using investment efficiency as mediating variable. Firstly, we use the statisticsof A-share listed companies in2008-2012, getting6387effective samples. Secondly,use relative compensation as the substitution variable of managerial overconfidence,and select those values greater than0, getting2331samples. Finally, make anempirical analysis of the managerial overconfidence degree, the corporateinvestment efficiency and firm values. The results are:(1) Managerialoverconfidence and firm values have the inverted u-shaped relationship;(2)Managerial overconfidence and investment efficiency has the inverted u-shapedrelationship;(3) Investment efficiency plays an intermediary role betweenmanagerial overconfidence and firm values.In a word, from the above analysis, we may draw the conclusion thatmanagerial overconfidence does not only create negative effects. A fittingoverconfidence can help managers not give up the project whose NPV is above zeroand avoid under-capitalization, thus improve firm values; while seriousoverconfidence will cause a decline in the enterprise value. In this paper, we haveenriched the theory of managerial overconfidence and bring up that managerialoverconfidence should have a optimal level. On this level，managers can fully graspthe investment opportunities, and maximize the firm values.