The Study Of Managerial Overconfidence, Internal Financing And Investment Efficiency

Decisions regarding investment and financing have always been long-standing issues for firms. Choosing the appropriate financing source and improving the investment efficiency has always been crucial for the management of enterprises as both of these issues. That's why it always remained mainstream research topic in corporate finance literature. With the advent of certain issues in corporate finance, such as principal-agent relationship and asymmetric information, some theories were established like theory of agency, pecking order theory and information economics to explain these issues. These theories address the phenomenon of internal funds availability because it directly affects investment efficiency of firms. It's believed that internal financing has the advantage of low financing cost and should be the first choice of enterprise financing.However, most of the enterprises are mainly based on external financing and the proportion of internal financing is very low. It is of great practical significance to study the relationship between the internal financing and investment efficiency of listed companies in China. Managers, as key decision makers, are expected to behave rationally because their behavior directly affects internal financing and investment decisions. Realizing the need to explore this very issue, this manuscript attempts to find the link between managers overconfidence as irrational behavior and investment efficiency of firms and to study the transfer mechanism of managerial overconfidence affecting investment efficiency through internal financing.Incorporating all these issues and utilizing firm sample from shanghai and Shenzhen stock exchange in the period of 2010-2014, this study based on behavioral finance tests the relationship between managerial overconfidence, internal financing and investment efficiency.The results of this study show that increasing internal financing can enlarge the scale of investment and reduce underinvestment of enterprises,but it will also lead to excessive investment. The managers with overconfidence are more likely to increase the internal financing and will affecting investment efficiency by internal financing. As a result of the different background of enterprise system in our country, the result shows that overconfident managers in state-owned enterprises are more likely to cause over-investment problem, whereas, relationship of managers'overconfident behavior and overinvestment phenomenon is not significant in non-state owned firms. However, it is also evident that managers having overconfident behavior affect underinvestment more in non-state owned enterprises than the overconfident mangers of state-owned enterprises. The conclusion not only broadens the research perspective of managerial overconfidence, enterprise investment and financing, but also provides guidance for selecting managers and improving corporate governance.