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Title: |
CEO Overconfidence and Firm Investment |
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Source: |
International Conference on Engineering and Business Management 2012(Part 4 Urban Management and Financial Investment)
(pp 3118-3121)
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Author(s): |
Lu Xie, Department of Accounting, School of Business, Renmin University of China, Beijing, China
Huanhuan Liu, Department of Accounting, School of Business, Renmin University of China, Beijing, China |
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Abstract: |
Based on data of A-shares listed companies in China, this paper studies the relationship between managerial overconfidence and firms’ overinvestment behaviors. We define a manager as an overconfident one if his company’s earnings forecast is higher than its actual earnings at least once. 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. When their firms obtain 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. Results of this paper indicate that it is necessary for firms to establish scientific and rigorous investment managing mechanism.
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