Research On Managerial Overconfidence And Its Impact On Corporate Investment And Corporate Value

Traditional financial theory contains many assumptions, which are built on the base ofindividual rationality. It makes that the market participants are considered as rational and theirdecision-making processes follow the Bayes rule in the traditional financial theory. That is, intraditional financial theory the facts that market participants’ cognitive and psychologicalcharacteristics will impact their decisions and lead to non-rational behaviors are ignored. Alsoin corporate finance theory, managers are considered rational decision makers and the impactof their psychological characteristics and non-rational behaviors on the business decisions arealso ignored. However, by observing the real financial phenomenon and combining with seriesof rigorous scientific psychology experiments, the financial economists find that humans arenot entirely rational, and people have a variety of cognitive and behavioral biases. Businessmanagers as a special group also have non-rational sides, in which overconfidence is the mostrepresentative.Enterprise managers’ cognition and behaviors have an important impact on corporatebusiness decisions, and investment decisions are key to enterprises and are the direct sourcesof corporate value. Therefore, as the makers of business decisions, managers’ overconfidenceirrational cognitive and behavioral biases will certainly affect the investment behavior ofenterprises, and have of far-reaching implications on corporate value.Based on the behavioral corporate finance theory, three empirical researches areestablished to study the listed company managers’ overconfidence and its impact on corporateinvestment and corporate value.Firstly, by examining the business climate index, the fact that the managers in our countryhave prevalent overconfidence bias of above average is found. Then by using the listedcompanies’ data, the factors such as gender, experience, enterprise scale, capital structure,which affect managerial overconfidence, are discovered through empirical research.Secondly, empirical studies are designed to identify the impact of managerial overconfidence on corporate investment and investment-sensitivity of cash flows. The factsthat managerial overconfidence will enlarge the corporate investment and the enterprises thathave overconfident managers have the sensitivity of financing cash flow are found.Thirdly, by discussing the interacting relationship between managerial overconfidenceand corporate value, a simultaneous relationship model is built to empirically test theinteracting relationship between managerial overconfidence and corporate value. The facts thatmanagerial overconfidence is affected by corporate value and the corporate value has thenonlinear inverted U-shaped changing with the increase of managerial overconfidence degreeare found.Finally, based on the above empirical conclusions, corresponding policyrecommendations are showed.