An Empirical Study On The Relationship Between Managerial Overconfidence,Internal Control And Companies' Overinvestment

Investment activity is one of the important activities of the enterprise's daily financial management,is of great significance to accelerate the development and create value.Since the reform and opening policy,many economic regulations and policies have come out and China's economy has been developing rapidly,but the waste of economic resources generated from blind investment and repeated construction is hidden under the rapid development.The traditional economics theory assuning that people are rational explain the overheating investment from the perspective of information asymmetry and agency conflict,namely the managers as agents expand the scale of investment in order to build a business empire and enjoy personal consumption.However,Heaton(2002)remind us without the principal-agent problem the investment decisions may still be inefficient.Overconfident managers believe their capacity too much so that the project's expected future cash inflows are overvalued and the discount rate is undervalued,resulting in the overvaluation of NPV and investment distortions.Managers are the center of power and their psychological characteristics must have a profound impact on the investment decision of enterprises.So this paper breaks the traditional hypothesis of economic man and link the cognitive biases to investment decisions from the perspective of management behavior in order to find the reason behind the blind expansion and over-investment phenomenon from new perspectives.Along with the perfect of the internal control system and information disclosure,internal control plays an increasingly important role in managerial and financial decision-making in the listed companies.Whether the effective operation of internal control as a kind of internal governance mechanism will curb the irrational behavior of executive and correct cognitive bias is worthy of our discussion.This paper investigated whether the internal control can constrain the over-investment caused by overconfidence and the illusion of control.Firstly,this paper reviews the current research and related theories and point out our research significance.We connect the overconfidence,internal control with the over-investment behavior together.Through analyzing the source and the forms of overconfidence we produce our hypothesis.We use 2011-2015 A share listed company as the initial sample.Finally through regression analysis and robustness test we point out our conclusion,namely the cognitive biases of the risks and benefits led to deviation from the optimal level of investment.On the one hand internal control directly restrain over-investment through the supervision mechanism,on the other hand it can control the illusion of managers through policies and procedures and reduce the calibration error to restrain over-investment.The innovation of this paper is that we add internal control system to the analysis of overconfidence and over-investment.We study the relationship among overconfidence,internal control and over-investment to provide a new idea for the research on overconfidence and over-investment.Furthermore,we reveal a new path for listed company to take reasonable measures to strengthen the construction of internal control and reduce the negative impact of managerial irrational behavior.