An Empirical Study On The Relationship Between Managerial Overconfidence,Equity Governance And Companies' Overinvestment

Corporate behavioral finance started from questioning and reconstructing the efficient market hypothesis.Its psychological basis are cognitive bias,overconfidence and vision theory,and its main concern is about capital allocation behavior and performance under the influence of irrational managers and irrational investors.Existing research theory of corporate behavior finance shows that managers' investment decisions are frequently influenced by their own psychological factors,especially by their overconfidence.As a deep-rooted psychological characteristic,managers' overconfidence which is shown as the overestimation of their own abilities and the excessive optimism to earnings of a project,will seriously affect their investment decisions to a large extent.Therefore,the psychological factor are likely to lead to deepen enterprise's investment distortions.In order to solve the problem of irrational behavior,the governance mechanism based on the traditional theory of corporate finance needs to be evolved.Under the background of the reform of China's capital market,researches on equity governance are more helpful for us to solve the agency conflicts and protect the interests of the shareholders of listed companies.As one of the core components of the company's internal governance,equity governance directly affects the formation and operation of corporate governance modes,as well as affects its major decisions significantly.This article focuses on the relationship between different ownership and management overconfidence-caused investment distortions on the base of previous theoretical and empirical researches related with management overconfidence,aiming at finding out ways to eliminate the impact management overconfidence caused to corporate investment distortions,help to set up the more reasonable equity structure,more effective internal governance and enrich the research on management overconfidence.In this paper,I synthetically use normative analysis and empirical analysis.The main content can be divided into the following six parts.The first part presents the research background and motivation of this paper.The second part summarizes the previous research results,further deduces out the theoretical basis of the research.The third part,according to the theoretical framework of the deduction,further puts forward the four hypotheses of this study.The fourth part is to set research variables and econometric models.The fifth part uses the empirical analysis to test the hypotheses for the further inspection.The sixth part summarizes the theoretical and empirical research results of the paper,puts forward the policy and suggestion on the basis of the previous conclusions.This paper selects the data of a list of corporation in Shanghai and Shenzhen stock markets during 2010-2014 as the research sample,do the theory analysis and empirical research on the relationships between equity governance,the overconfidence of the executives and companies' overinvestment.The theoretical analysis mainly consists of the methods of induction and deduction,in order to obtain specific logic of the governance mechanism.The empirical analysis mainly consists of fixed effect regression,Logistic regression and robustness test,which deeply verify the four hypotheses proposed in this paper and finally draw reliable conclusions.It is found that overconfident executives tend to overestimate their own ability,and make investment decisions that damage the value of the company,which leads to the deepening of the degree of excessive investment.And as the core of corporate governance,the nature and the number characteristics of equity structure will have influence on the degrees of excessive investment caused by managerial overconfidence.(1)In state-owned firms,the company executives usually plays the roles of shareholders and managers due to the owners phantom of state-owned firms,which in a certain extent might exacerbates the psychological basis of executives.Thereby the psychological basis will strengthen the managerial overconfidence and then lead to excessive investment of the companies.Increasing proportion of nonstate-owned stocks can alleviate the problem of the absence of the real owners of the state-owned enterprises.(2)Higher ownership concentration can lead to more overinvestment caused by managerial overconfidence.Because enhancement of executives' overconfidence is likely to be derived from the effects of collusion between large shareholders and executives,which leads to executives'self-suggestion,the expansion of power and other irrational tendencies.(3)The promotions of equity balance degree can weaken excessive investment caused by the executives' overconfidence,because on this occasion the big shareholders(Top2-10)have the ability to assume responsibility of supevision of the first major shareholders and executives.Due to the protection of their own interests,they have more motivation to give effective supervision on executives' investment decision-making in order to reduce excessive investment caused by managers,overconfidence.The main contribution of this paper lies in the development of the research framework and the deepening of the research perspective.First of all,this paper extends the research framework of the governance of managerial overconfidence.The role of equity governance on the irrational factors of executives is largely introduced into the analysis.Secondly,the paper also analyzes the different aspects of the ownership structure.The specific analysis of the paper is about influence of the equity characteristics on irrational investment phenomenon caused by the excessive confidence of executives.Thirdly,this paper puts forward policy recommendations,compensation mechanism,manager market mechanism and the reform of state-owned enterprises from the aspects of stock ownership structure,in order to help the listed companies to improve their equity arrangement and strengthen internal and external supervision.Indeed,because of the constraints in terms of time and capacity,this paper still has some shortcomings in the theory analysis and analysis technology.These unsolved issues are also the direction of my further attentions and researches,and I also sincerely urge readers to give criticisms and suggestions to me.Finally I hope this research can contribute a small force to the existing fields of company behavioral finance and corporate governance,and can inspire the more meaningful researches and explorations in the future.