Managerial Overconfidence Of Chinese Listed Companies And Its Impact On The Cash Dividend Policy

With the development of economy and society, China’s stock market has become more sophisticated, listing has become the main form of financing of modern joint-stock company, and listed company dividend policy has become one of the major decisions facing their company managers. Appropriate dividend policy will not only reflect the company’s past operating performance, but also indicate the level of sustainable development. Now dividend distribution policy has become one of the hot issues of domestic and foreign academic circles.Although the classical theory of dividend distribution policy which based on the "rational economic man" hypothesis can provide a reasonable explanation for the majority dividend vision of the stock market, but there are still many dividend vision that classical theory cannot be explained, such as low cash dividend and financing dividend. So the behavior dividend theories which based on the "non-rational economic man" hypothesis emerged that offers another explanation for these dividend visions. Existing research suggests that overconfidence is the most common irrational behavior which found by psychology of decision and a common phenomenon of the company’s management which will affect the company’s financial decisions. The relevant literature at home and abroad shows that there exist a negative correlation between managerial overconfidence and the cash dividend policy. Therefore, this passage studies the Chinese listed company’s cash dividend policy from the perspective of managerial overconfidence.Existing research shows that overconfident managers tend to overestimate the benefits and underestimate the risk of investment projects that make them possible implement the investment projects with negative net present value, resulting excessive investment in company. At the same time, when faced with financing needs, overconfident managers will prefer internal financing that the main source of financing methods is to reduce the cash dividend payment. Therefore, compared to non-overconfident managers, overconfident managers are more reluctant to pay cash dividends. On the basis of the relevant literature, this article proposes two hypotheses: the first is that firms led by overconfident managers more reluctant to pay cash dividends than firms led by rational managers; the second is that firms led by overconfident managers pay lower cash dividends than firms led by rational managers.At present, the domestic measure on managerial overconfidence has not yet formed a unified standard. On the basis of the relevant literature, we use earnings forecast bias and the change in the number of managers’ shares, which is use for robustness testing, to measure managerial overconfidence. Since 2002, the Shanghai and Shenzhen Stock Exchange requires that the annual earnings forecasts of listed companies must issue in the third quarterly report. So the annual earnings forecasts of Chinese listed companies become a prior forecast predicted, which as a measure standard of managerial overconfidence. Therefore, this article chooses China’s A-share listed companies which released the annual earnings forecast in the third quarterly report in 2007-2013 years as samples, and use Logistic model and Tobit model to test hypothesis one and hypothesis two respectively.Empirical results show that firms led by overconfident managers more reluctant to pay cash dividends than firms led by rational managers and firms led by overconfident managers pay lower cash dividends than firms led by rational managers, which proved the correct of this article assumes. Therefore, we propose the following recommendations: firstly, firms should establish an warning mechanism of managerial overconfidence, which can effectively identify the manager if there is overconfidence; secondly, firms should establish and improve a balanced decision-making mechanism, reducing the manager’s overconfidence bias awareness and limiting the rights of managers in decision-making; thirdly, firms should establish a scientific management learning mechanism, reducing managers overconfidence bias.