The Research On Overinvestment Affected By Overconfidence Based On Political Connections

As an important form of the inefficient investment, overinvestment is widespreadin China’s economy during the transition period. After the2008financial crisis, ourgovernment introduced a series of financial, industrial and other related policies tostimulate the economy, respectively, which make China’s overinvestment phenomenonmore serious. Both enterprises and government departments have been trying to takeaction to improve the present situation of the overinvestment in China, but the effectsare not obvious. So in order to take more effective measures to govern this problem, itis very necessary to delve into the factors of causing overinvestment and itsmechanism.Based on the behavioral corporate finance, we analyze the influence ofoverconfidence on overinvestment, and introduce the political connections, a kind ofnon-institutional mechanism, to delve into the influence mechanism of it onoverinvestment through managerial overconfidence and investment conditions, whichis the behavioral outcome of managerial overconfidence. The research result showsthat, managerial overconfidence and overinvestment is significant positive correlation,when a company has enough free cash flow and investment opportunities,overconfident managers will over-estimate the project’s cash flow situation andincome,and then more likely to make overinvestment decisions; after introducing thepolitical connections, we find that political connections contribute to more seriousoverinvestment which is caused by managerial overconfidence, and we also find thatit is more serious in the non-state-owned enterprises; in addition, we also classifiesthe political connections according to its shaping path, we find that,compared withthe political connections of government officials, the political connections ofrepresentatives is more likely to exacerbate managerial overconfidence and leads tooverinvestment than the political connections of government officials. These resultsshow that, on the one hand, managerial overconfidence is an important factor thataffects enterprise overinvestment behavior; on the other hand, political connectionsbecome an important factor that affects enterprise overinvestment behavior by addingthe enterprise overinvestment behavior caused by managerial overconfidence.According to the above conclusions, we give the corresponding policyrecommendations. We recommend to governing the overinvestment setting from thefollowing four aspects, such as we should improve the corporate decision-making and management evaluation mechanism、improve the project evaluation mechanism ofinvestment、 administration commission and deepen reform of the state-ownedenterprises and improve the internal governance mechanisms of non-state enterprise.