CEO Overconfidence And Corporate Performance Fluctuation

As the main part of enterprise strategy and decision-making,the senior management(hereinafter referred to as "senior management"),who determines the enterprise investment,financing and distribution of benefits and other important links,is an important factor affecting business performance.Academic research on corporate performance is more concerned about the performance of the increase,that is,the level of performance level;and corporate performance fluctuation is also an important manifestation of corporate governance effect,which reflects the risk of business status.Most of the traditional economics research is based on the "rational person" hypothesis that executives always try to maximize the interests of shareholders from the point of company.However,with the emergence of abnormal financial markets,the "rational person" hypothesis increasingly highlights its limitations.Scholars begin to turn their attention to the impact of irrational factors on corporate decision-making behavior,including the individual characteristics of CEOs.Existing research found that irrational factors of executives would lead to business management decision-making bias,especially overconfidence.As a ubiquitous cognitive bias,overconfident CEOs are more likely to believe in their ability to overestimate future earnings,underestimate risk,and invest more,regardless of whether the investment decision is correct or not,which will increase the performance fluctuations.As an effective alternative mechanism for corporate governance,can accounting conservatism and internal control alleviate the shortcomings of overconfidence?This paper first studies the relationship between CEOs overconfidence and corporate performance volatility,and then introduces the two variables of accounting conservatism and internal control to discuss whether the two can effectively mitigate the impact of overconfidence on corporate performance volatility.Overconfident CEOs overestimate their ability to deal with problems,intend to invest more projects and easily overlook the "bad news";they overestimate the benefits and underestimate the risk,thereby increasing the degree of corporate performance fluctuations.Accounting conservatism timely respond to "bad news" and release information,forcing CEOs to raise awareness and take appropriate measures as soon as possible;good internal control can effectively manage the enterprise risk,constrain the investment behavior of the executives,make the decision more rationalized,which is more conducive to the long-term stable development of enterprises;good internal control can effectively alleviate the impact of CEOs overconfidence on corporate performance fluctuations.This study was conducted on the basis of the construction of multiple regression models.In the selection of the main variables,we use the CEO's personality index,such as education,age,gender and educational background,to construct the index of overconfidence;for accounting conservatism,we use the C-Scores,which are currently recognized by the academia as a substitute variable;we use the Dib Hei Q index to measure the effectiveness of the internal control of the enterprise;we measure corporate performance fluctuations though standard deviation of net assets yield in three years.The study find that:(1)CEOs overconfidence and corporate performance fluctuations have a positive correlation.(2)Accounting conservatism helps to mitigate the impact of overconfidence on performance volatility.(3)Effective internal control weakens the effect of overconfidence on corporate performance volatility.