Research On The Influence Of Managerial Overconfidence On Non-efficiency Investment

Scientific and reasonable investments are conducive for company's expansion and increase of company's wealth which in turn can promote company's long term development. However, in recent years, corporations'non-efficiency investments become more frequent and draw the attention of practice and academic fields. In the past, scholars mainly elucidate this phenomenon using principle-agent theory and asymmetry information theory. With the emergence of behavioral decision theory, however, scholars begin to introduce the psychological features of the managers into study and explain the reasons of non-efficiency investments from the angle in which managers are overconfident. Since overconfidence is a psychological feature which cannot be eradicated, scholars research from different angles on how to effectively restrict the non-efficiency investments by overconfident managers. The board governance is an important content of corporation governance. It is a topic worth lucubration whether the board governance can play its restrictive role.This article searches the literatures and relevant theories regarding managerial overconfidence and company's non-efficiency investments and uses listed manufacturing companies of A shares in Shenzhen and Shanghai Stock Markets from 2010 to 2014 as research sample to study the influences of managerial overconfidence on companies' non-efficiency investments and examines the level of sensitivity of companies with overconfident managers to investment-cash flows, and further empirically analyzes the restrictive effects of board governance on overconfident managerial non-efficiency investments. Finally, we ran a robustness test to ensure the correctness of our result.Results from the study in this article suggest:(1) Overconfidence of the managers and companies'non-efficiency investments are positively related, i.e. the more overconfident the managers are, companies will be more susceptible to non-efficiency investments. Since overconfident managers have confidence on their own capabilities and knowledge, they tend to overestimate returns of the project and underestimate the risks and lead to companies'overinvestments. Meanwhile, companies with overconfident managers have stronger sensitivity to investment-cash flows.(2) In the board governance, positions of chairman and general manager separated, diligence of the board of directors is helpful in enhancing the supervision for managers' decisions and can effectively restrict non-efficiency investments of the overconfident managers, especially for the overinvestments. However, under China's system, independent director have not played their supervising roles, the increase of the ratio of independent Directors cannot pose any effectively restriction on overconfident managers' non-efficiency investments.