Financial Constrains, Managers’ Overconfidence And Trade-credit Financing

With the emerging of corporate behavioral finance, the relationship betweenmanagers’ irrational behavior, especially cognitive bias of overconfidence，andcorporate financial decision has becoming a new hot issue. Based on the backgroundof Chinese institution，there are few of studies on the relationship between managers’overconfidence and trade-credit financing behavior. Therefore, this paper will try tostudy the following questions: whether managers’ cognitive bias of overconfidenceexists in Chinese listed companies? How does managers’ overconfidence influencecompanies’ trade-credit financing behavior? Moreover, how does the financialconstrains will influence the relationship between managers’ overconfidence andtrade-credit financing behavior?Firstly, this paper traces psychology origin of managers’ overconfidence，andexpounds the inherent relationship between managers’ overconfidence and companies’trade-credit financing. Secondly, on the basis of previous study, this paper establishesa model to explain the relationship between managers’ overconfidence andtrade-credit financing behavior. Thirdly, this paper establish a new model to measurethe degree the companies’ financial constrains considering the special background ofour country.The main contribution of this paper is as follows:1. This paper proves that the relationship between managers’ overconfidence andtrade-credit financing is positive, which means that the managers with overconfidencebias use more trade-credit in order to meet the finance needs. Using the short-termfunding to meet the needs of long-term investment is a radical financing strategy,which will bring a higher financial risk to the company. Meanwhile, the expansion ofinvestment brings a higher business risk. In this case, the total risk of the company isvery high and if the company can’t pay off the debt or make mistakes in the operation,the development of enterprises will be greatly impacted.2. Under environment of high financing constraints, the relationship betweenmanagers’overconfidence and trade-credit is further strengthened. With relatively lowfinancing constraints, the relationship between managers’ overconfidence and trade-credit financing is no longer significant, indicating that overconfident managers are not actively choosing the trade-credit financing. They have no better way of financingbut trade-credit financing. The financing constraints environment enlarges the extentof managers’ overconfidence and distorts the financial decisions and financialbehavior of the enterprises to some degree. In this case, the whole society, especiallythe government departments should make every effort to ease the financingconstraints of listed companies in our country.