Product Market Competition,CEO Overconfidence And Overinvestment

The investment policies of the firm have always been the research emphasis of industrial organization theory and corporate finance theory and had great effect on the sustainable operations of the company.The traditional "rational man" theory assumes all market participators to be reasonable and wise,especially for the CEO of the firm.They are meant to be prudent and calculative,the sole ambition of their career seems to be the utmost interest of the firm,but not for themselves.As a matter of fact,there is never any shortage of competition in the product market and CEO's investment decisions are far from pure rationalism.The overconfident psychological deviation of CEO himself will lead to overinvestment of the firm,causing unreasonable investment expansion,inappropriate allocation of resources and surplus of productivity.Recent researches mainly center on the correlations between CEO overconfidence and overinvestment,as well as the product market and overinvestment.These existing researches have only taken into account the interior decision-maker CEO or the exterior product market competition in the analysis of overinvestment behavior.In recent decades,China's economy has grown so rapidly that we now call more urgently for the investment quality than quantity,thus making it indispensible to study the formational and restrictional mechanism of overinvestment in the respect of both exterior and interior corporate governance.With data from A-share listed companies in China from 2011 to 2013,this paper explores the influence of CEO overconfidence and product market competition of the company on its overinvestment behavior.The theoretical bases of this study are behavioral finance theory and product market competition theory.This paper mainly falls into six parts.The first part is about the background knowledge.The second part summarizes the related theories and literary review so as to introduce the three research hypothesis.The third part is about the research design,namely the definition of variables and establishment of the model.The forth part is the empirical research of the four models.We adopt multiple regression and binary logistic regression method in the empirical study of the relations between product market competition and overinvestment,CEO overconfidence and overinvestment,the regulatory effect of product market competition on the correlation of CEO overconfidence on corporate overinvestment.The fifth part takes in Yunnan Tin Company Limited as an example to further validate the hypothesis.The sixth part contains the conclusion and enlightment on future operations of the firm.It turns out that there is a positive correlation between CEO overconfidence and overinvestment since they are quite pervasive nowadays among listed companies in China.Moreover,the external product market competition forms a strong restraint and regulation towards the firm's overinvestment decision.The high intensity of product market competition will constrain the firm's overinvestment through decreasing the CEO's overconfidence level.Given that the existing researches concerning overinvestment mainly refer to principal-agent relationship,this paper comprehensively takes CEO's personal temperament of overconfidence and product market competition in its research.As a result,this study contributes to the researches concerning the effect of market competition and CEO's personal traits on the firm's overinvestment.It will also bring both firms and readers with new enlightenment on the regulation of the firm's investment policy through internal and external corporate governance.