Managerial Overconifdence, Compensation Incentive And Firm Value

With the development of behavioral finance, we gradually realize that theassumption of “managers are rationality” has a lot of limitations. Managers oftenmake "irrational" decisions, and they will affect the company’s financial managementobjectives-maximize the value of the company-to achieve. Recently, some scholarshave focused on the researches of managerial overconfidence as well as its effects onthe company’s M&A, investment and financing decisions. However, research of therelation between the managerial overconfidence and firm value is almost blank. As animportant part of the theory of behavioral corporate finance, managerialoverconfidence theory has broken the traditional study of "rational" assumptions, andpays more attention to the irrational behavior of managers in decision making, andpromotes the researches of the corporate finance theory development in a morerealistic direction.With the rapid development of the market economy, the competitiveness ofenterprises is essentially the talent competition, and the outstanding senior manager isone of the scarcest human resources. As an important human resource, managers’ payhas been taken extensive attention by scholars from various countries in the world,especially in recent years, the rapid rising of managers’ pay prompting even moreattention and discussion.Studies have shown that both managerial overconfidence and salary incentivewill affect the value of the company. However, what kind of the relationship is exactlyexists between the degree of managerial overconfidence and salary incentive inaffecting the value of the company. Although some literatures have discussed intheory, there are poor empirical evidences to support. In this paper, we take Shanghaiand Shenzhen A-share listed companies which listed between2006and2011as theresearch sample, verify in empirical test that how do the managerial overconfidenceand salary incentive affect the value of the company, as well as the internalrelationship between the three. Results indicate that China has nearly1/4of thenumber of listed companies of which the managers are overconfidence, managerialoverconfidence will reduce the value of the company, but the effect is not significant;in turn, the value of the company has significant reverse effect of the degree of themanagerial overconfidence. In addition, there is a significant negative correlation between managerial overconfidence and salary incentive, as well as a significantpositive correlation between salary incentive and the value of the company, and thereis some alternative relationship between managerial overconfidence and salaryincentive in affecting the value of the company. Meanwhile, the corporategovernance-related factors will also have some impact on the relationship between thethree. The conclusions drawn in this paper not only enriches the theory of theprincipal-agent and optimal contract, but also has a strong enlightenment significancefor the decision-making of a corporate in reality.