Managerial Overconfidence, Inefficient Investment And Firm Value

In recent years, the phenomenon of massive production capacity prevails inmanufacturing industry, which can be explained by inefficient investment behavior. Classicfinance theory explains this behavior in perspective of asymmetric information andprincipal-agent, basing on hypothesis of rational people without considering the irrationalfactors of decision-maker. Behavioral finance believes that overconfidence bias prevailsamong managers, and this irrational character of the decision-maker may affect corporateinvestment.We select a2009-2012annual panel data from the listed manufacturing companies,trying to research on inefficient investment behavior in the perspective of managerialoverconfidence. The result verifies that investment efficiency is affected both by managerialoverconfidence and free cash flow. By introducing a free-cash-flow variable, we establishcontrolling groups and reveal the logical relationships among managerial overconfidence,inefficient investment and firm value. This article mainly drew the following conclusions: a)In the case of abundant free cash flow, a higher confidence level will exacerbate excessiveinvestment. When free cash flow is insufficient, it will result in under-investment to somedegree. b) The relationship between non-efficient investment and firm value can bedescribed in nonlinear way. c) The relationship between inefficient investment andenterprise value is constrained by managerial overconfidence and corporate free cash flow.This paper has two main innovative points. Firstly, from the perspective of managerialoverconfidence, this paper explains the inefficient investment behavior of manufacturingcompanies, breaking through rationality hypothesis. In the second place, this article explainsthe relationship between investment inefficiency and firm value in view of non-rationalfactor, thus establishes the logical structure among managerial overconfidence, investmentinefficiency and firm value.