Managerial Overconfidence And Corporate Valu

The value of firm is a comprehensive indicator that considers companies’profitability, the ability of development and the ability of risk management, whichinfluenced by many factors. Based on principal-agent theory "rational agent"hypothesis, the separation of ownership and management leads shareholders tomonitor managers with difficulty, managers in order to maximize their own interestsmay reduce shareholders’ wealth, and harm the firm value. With the furtherdevelopment of behavioral finance, western scholars have questioned the traditionalprincipal-agent theory, argues that managers are not always rational, irrationalbehavior they have may damage firm value, overconfidence is a typical. Therefore,research on the influence of managerial overconfidence is very important to firmvalue.Firms often think that use derivatives can reduce the risk, the empirical researchof domestic and foreign researchers have also proved. However the financial crisishas reminded people, researchers began to consider the value of financial innovation.Huge losses of China national aviation fuel company show that using the derivativescan’t always hedge, it may increase the risk and lead bankruptcy. In recent years,more and more examples shows using derivatives may damage the value in China. Soit’s very important to research on how derivatives influence Chinese firms.Overconfident Managers may underestimated the risk and overestimate earnings.They think that the external market underestimated the value of the firm, it’s not wisechoosing equity financing, so they tend to finance internal or debt. However, suchdecision not only may lead to alienation, also may let the enterprise bear the high debtlevel, increase the financial risk, damage firm value. And as this paper has said before,most managers and researchers think using derivatives can reduce risk, and as thisarticle speculated, if enterprises use derivatives, managers will think firms can avoid greater risk and become more radical, making the enterprise exposed to greater risks,reduce the firm value.In this paper, based on the China data, we use the profit forecast method tomeasure managerial overconfidence. We also collected the data of derivatives,research on how managerial overconfidence and derivatives influence firm value, andwhen use derivatives, how managerial overconfidence influence the firm value. In thispaper, using manufacturing listing corporate data which from2008to2013. In theframework of behavioral finance, this paper discusses how managerial overconfidenceinfluence on the firm value, the results of the study shows that managerialoverconfidence does indeed damage the value of the enterprise, managerialoverconfidence leads to irrational decision, causing investment alienation, excessivedebt and will damage firm value at last. The paper also found that the use ofderivatives can’t hedge, however it will damage firm value. In the use of financialderivatives business, managerial overconfidence may damage firm value greater.When replace the variables of managerial overconfidence and corporate value, thisconclusion still holds.This research is helpful to recognize the harm of managerial overconfidence, andfirms can take corresponding measures. The firm should establish self evaluationmechanism of managers and information feedback mechanism. Recognize andimprove managerial overconfidence. At the same time, the firm should formulaterules for the use of derivatives, in order to reduce the risk.