Skip to main content

Managerial overconfidence and over-investment: Empirical evidence from China

Abstract

Based on data of A-shares listed companies in China, this paper studies the relationship between managerial overconfidence and firms’ overinvestment behaviors. We first define a manager as an overconfident one if his or her compan’s announced earnings forecast is higher than its actual earnings at least once in 2002–2004. After controlling such factors as growing opportunity, size, etc., we find that overconfident managers tend to over-invest and their overinvestment behaviors have higher sensitivity to cash flow generated by financing activities. In other word, when their firms obtain an abundant cash flow from financing activities, overconfident managers will over-invest, or vise versa. Contrary to other relevant studies, we find that the sensitivity between over-investment and free cash flow has little to do with managerial overconfidence. Robustness testing is conducted to verify the reliability of our conclusions. We also use “whether top managers increase their holdings of company shares within the observation period” as a substitute variable for managerial overconfidence and run the tests again, and the results are consistent with the above. Finally, findings of this paper indicate that it is necessary for firms to establish a scientific and rigorous investment managing mechanism.

摘要

以非金融类A 股上市公司为研究样本, 考察了管理者过度自信与企业投资行为的关系。 如果样本公司在2002–2004 期间内至少有一次发布的盈利预测值大于实际盈利, 我们就将该公司的管理者定义为过度自信的管理者。 控制了增长机会、 规模等因素后, 研究发现, 过度自信的管理者倾向于过度投资, 并对融资活动产生的现金流有更高的敏感性。 即当公司有充裕的融资活动现金流时, 过度自信的管理者会过度投资; 反之, 则投资不足。 还发现过度投资与经营活动产生的自由现金流之间的敏感性基本上不受管理者过度自信心理特征的影响, 这与其他一些研究的结论不一致。 此外, 我们以样本期间内管理者是否增持本公司的股票作为过度自信的替代变量重新进行了研究, 研究结论保持一致。 结论证明, 公司有必要建立科学、 严格的投资管理制度。

References

  1. Baker M, Ruback R S, Wurgler J (2006). Behavioral corporate finance: A survey. Working paper

  2. Brown R, Neal S (2006). CEO overconfidence, CEO dominance and corporate acquisitions. Working Paper

  3. Camerer C, Lovallo D (1999). Overconfidence and excess entry: An experimental approach. American Economic Review, 89: 306–318

    Google Scholar 

  4. Cooper A C, Woo C Y, Dunkelberg W C (1988). Entrepreneurs perceived chances for success. Journal of Business Venturing, 3: 97–108

    Article  Google Scholar 

  5. Heaton J B (2002). Managerial optimism and corporate finance. Financial Management, 31: 33–45

    Article  Google Scholar 

  6. Hribar P, Yang H (2006). Managerial overconfidence, management earnings forecasts, and earnings management. Cornell University Working Paper

  7. Jensen M (1986). Agency costs of free cash flow: Corporate finance and takeovers. American Economic Review, 76: 323–329

    Google Scholar 

  8. Jensen M, Meckling W (1976). Theory of the firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3: 305–360

    Article  Google Scholar 

  9. Landier A and David T (2004). Financial contracting with optimistic entrepreneurs: Theory and evidence. Working Paper

  10. Langer E J (1975). The illusion of control. Journal of Personality and Social Psychology, 32: 311–328

    Article  Google Scholar 

  11. Lin Y, Hu S, Chen M (2005). Managerial optimism and corporate investment: Some empirical evidence from Taiwan. Pacific-Basin Finance Journal, 13: 523–546

    Article  Google Scholar 

  12. Malmendier U, Tate G (2003). Who makes acquisitions? CEO overconfidence and the market’s reaction, Working Paper

  13. Malmendier U, Tate G (2005). CEO overconfidence and corporate investment. Journal of Finance, (6): 2661–2700

  14. Myers S, Majluf N (1984). Corporate financing and investment decisions: When firms have information that investors do not have. Journal of Financial Economics, 13: 187–221

    Article  Google Scholar 

  15. Ohlson J A (1995). Earnings, book value, and dividends in equity valuaion. Contemporary Accounting Research, 11: 661–687

    Article  Google Scholar 

  16. Richardson S (2006). Over-investment of free cash flow. Review of Accounting Study, 11: 159–189

    Article  Google Scholar 

  17. Roll R (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59: 197–216

    Article  Google Scholar 

  18. Ulrike M, Geoffrey T (2003). Who makes acquisitions? Managerial overconfidence and the market’s reaction. Working Paper, Stanford University

  19. Ulrike M, Geoffrey T (2005). Managerial overconfidence and corporate investment. The Journal of Finance, 6: 2661–2700

    Google Scholar 

  20. Weinstein N (1990). Unrealistic optimism about future life events. Journal of Personality and Social Psychology, 39: 806–820

    Article  Google Scholar 

  21. 郝 颖, 刘 星, 林 朝南 (Hao Ying, Liu Xing, Lin Chaonan) (2005). 我国上市公司高管人员过度自信与投资决策的实证研究 (An empirical research on the general managerial overconfidence and investment decision for the listed companies). 中国管理科学, (5): 142–148

  22. 黄 少安, 张 岗 (Huang Shao’an, Zhang Gang) (2001). 中国上市公司股权融资偏好分析 (Analysis on China’s listed companies’ equity financing preference). 经济研究, (11): 12

  23. 陆 正飞, 叶 康涛 (Lu Zhengfei, Ye Kangtao) (2004). 中国上市公司股权融资偏好研究 (Study on the preference for the equity financing of Chinese listed companies). 经济研究, (4): 50–59

  24. 吴 世农, 吴 超鹏, 郑 方镳 (Wu Shinong, Wu Chaopeng, Zheng Fangbiao) (2007). 管理层学习行为, 过度自信行为与连续并购绩效变化 (Managerial learning, managerial overconfidence a performance change in continuous acquisition and merger). Working paper

  25. 余 明桂, 夏 新平, 邹 振松 (Yu Minggui, Xia Xinping, Zhou Zhensong) (2006). 管理者过度自信与企业激进负债行为 (Managerial Overconfidence and Enterprises’ Radical Debt Financing Behaviors). 管理世界, (8): 104–112

  26. 朱 武祥 (Zhu Wuxiang) (2002). 上市公司募集资金投向决策分析 (Analysis on the investment decisions of raised funds of China’s listed companies). 证券市场导报, (4): 49–53

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Min Zhang.

Additional information

Translated and revised from Nankai Guanli Pinglun 南开管理评论 (Nankai Business Review), 2008, (2): 77–83

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Wang, X., Zhang, M. & Yu, F. Managerial overconfidence and over-investment: Empirical evidence from China. Front. Bus. Res. China 3, 453–469 (2009). https://doi.org/10.1007/s11782-009-0022-2

Download citation

Keywords

  • over-investment
  • overconfidence
  • cash flow from financing activities
  • free cash flow

关键词

  • 过度投资
  • 过度自信
  • 融资现金流
  • 自由现金流