A Research About The Influence Of Manager Overconfidence On Corporate Financing Strategy

In1958, Modigliani and Miller proposed MM theory model and the MM theory model laid the foundation of modem capital structure theory. Then people continued to relax restrictions on the MM theory, thus forming a different theory of capital structure. However, these models are based on assumes of "managers rational", they cannot explain the irrational behavior of managers. This paper is mainly study manager overconfidence which is one typical expression of manager irrational, and test its impacts on enterprise capital structure, debt financing and also enterprise performance. The purpose of this paper is to reveal the effect of managerial overconfidence on corporate government, and make the managers to overcome the psychological deviation to avoid making mistakes when they making decisions.At present, there are many documents and literatures on manager overconfidence and they have formed one consistent point of view:overconfidence managers will over-valuate their own management ability, over-valuate the income rate on investment of project in future and underestimate project existence risk. Therefore, overconfident managers will prefer over investment which will lead to a lot of money demand. When the enterprise is in financing, the overconfidence managers will prefer debt financing because they think the enterprise value will be underestimated by the outside word and the cost of equity financing is higher during the financing. However, at present the consistent conclusion of the manager overconfidence impact on the timeline choice of debt financing is not formed yet.This paper constructs the manager overconfidence index after a summary of relate theory and the change of holdings number will be select as the index to evaluate the manager overconfidence.3hypotheses are set up in this paper and they are respectively study on the manager overconfidence impacts on enterprise capital structure, timeline of debt financing and enterprise performance. In this paper, asset-liability ratio, short-term debt ratio and long-term debt ratio are used to evaluate the enterprises capital structure; The enterprises capital structure is used to evaluate timeline of debt financing; Tobin Q, cash flow per share (CFPS) and asset sales rate of return (OROA) are used to evaluate enterprise performance; SPSS18.0is used to do liner regression analysis. In the end, from the result we can find out:the overconfidence of managers will urge themselves prefer to chose debt financing and short-term debt financing; and this debt chose strategy will lead enterprise performance decline. Robustness test is done in chapter5of this paper. Earnings forecast is used to evaluate the overconfidence of managers and based on this the relationship between managers overconfidence and current debt ratio is studied and get the same conclusion with above text. The above conclusion shows managerial overconfidence is one of the factors that affect the choice of enterprise debt financing strategy, and will bring enterprise performance decline.From the perspective of managers overconfidence, this paper enriches and expands the research of enterprise debt financing theory and enterprise governance theory, and this will provide empirical support for future research.