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Article
Publication date: 1 February 2016

Irene Wei Kiong Ting, Hooi Hooi Lean, Qian Long Kweh and Noor Azlinna Azizan

The purpose of this paper is to investigate the impact of managerial overconfidence on corporate financing decision and the moderating effect of government ownership on…

4220

Abstract

Purpose

The purpose of this paper is to investigate the impact of managerial overconfidence on corporate financing decision and the moderating effect of government ownership on the relationship between managerial overconfidence and corporate financing decision.

Design/methodology/approach

Pooled OLS, fixed effect models (FEM), and Tobit regressions are employed to examine the relationship between managerial overconfidence, government ownership and corporate financing decision of publicly listed companies in Malaysia for the period of 2002-2011.

Findings

The authors conclude that: first, CEO overconfidence is significantly and negatively related to corporate financing decision; second, a higher degree of managerial overconfidence would result in lower leverage in GLCs, whereas the effect does not significantly exist in NGLCs; third, a larger ownership of government in a firm will reduce the negative effect of managerial overconfidence on corporate financing decision; fourth, the moderating effect of government ownership on the association between managerial overconfidence and corporate financing decision in GLCs is more effective than NGLCs; and fifth, government intervention plays its role as moderating effect on the relationship between managerial overconfidence and corporate financing decision in firms with lower ownership concentration but not in firms with high ownership concentration (more or equal than 50 percent).

Practical implications

The finding implies that the moderating effect of government ownership on the association between managerial overconfidence and corporate financing decision in GLCs is more effective than NGLCs.

Originality/value

The authors make the first attempt to test the moderating effect of government ownership on the relationship between ownership concentration and corporate financing decision.

Details

International Journal of Managerial Finance, vol. 12 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 1 March 2021

Mehdi Safari Gerayli, Mohammadreza Abdoli, Hasan Valiyan and Ali Damavandi

The characteristic of managers’ personality is a key factor in their decision-making. One of the most important personality characteristic of managers is overconfidence

Abstract

Purpose

The characteristic of managers’ personality is a key factor in their decision-making. One of the most important personality characteristic of managers is overconfidence. Overconfident managers have false trust about their abilities and have a positive view of the firm’s future performance. Thus, the purpose of this study is to investigate the association between managerial overconfidence and internal control weaknesses (ICW) of the firms listed on the Tehran Stock Exchange (TSE).

Design/methodology/approach

Sample includes the 480 firm-year observations from companies listed on the TSE during the years 2013–2017, and the hypothesis is tested using multivariate regression model based on panel data analysis.

Findings

The authors found that managerial overconfidence increases the firms’ ICW. The findings are robust to alternative measure of managerial overconfidence, individual analysis of the research hypothesis for each year and endogeneity concern. Moreover, additional analysis reveals that the positive relationship between managerial overconfidence and ICW is less pronounced in larger firms.

Originality/value

To the best of the authors’ knowledge, this is the first study to analyze the association between managerial overconfidence and ICW in emerging capital markets and, therefore, can contribute to extend the current literature on managerial overconfidence and ICW in developing countries, especially Iran’s emerging capital market.

Details

Accounting Research Journal, vol. 34 no. 5
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 21 August 2021

Jiaxin Liu and Dongliang Lei

This paper aims to examine the relation between managerial ability and stock price crash risk, conditional on managerial overconfidence. In addition, conditional on…

Abstract

Purpose

This paper aims to examine the relation between managerial ability and stock price crash risk, conditional on managerial overconfidence. In addition, conditional on managerial overconfidence, the authors investigate the effect of managerial ability on firms’ choice of bad news hoarding channels, which result in a stock price crash.

Design/methodology/approach

Using a sample of 24,289 firm-years from companies listed on Compustat and CRSP from 1994 to 2018, the authors conduct panel regression analysis.

Findings

The authors find that managerial ability is positively associated with stock price crash risk only when managerial overconfidence is high. Furthermore, the authors find that managerial ability seems to exacerbate (attenuate) the bad news withholding by the overconfident managers using the earnings guidance (earnings management) channel. The authors find limited evidence that high-ability managers are likely to withhold bad news through the overinvestment channel and “other channels” when managers are overconfident. Finally, the authors find that the joint effect of managerial overconfidence and managerial ability on firms’ crash risk is more pronounced when there is a material weakness in firms’ internal controls, high investor belief heterogeneity and high information asymmetry. However, this effect appears to dissipate during the recent financial crisis in 2008.

Originality/value

This research reveals that managerial ability is costly to firms by engendering bad news hoardings and stock price crash risk when managers are overconfident. It also sheds light on how managerial overconfidence and managerial ability affect managers’ choice of bad news withholding channels and stock price crash risk. Finally, the paper is of practical value to the board of directors in selecting the prospective executives.

Details

Review of Accounting and Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 15 November 2019

Quanxi Liang, Leng Ling, Jingjing Tang, Haijian Zeng and Mingming Zhuang

The purpose of this paper is to empirically analyze whether and how managerial overconfidence affects stock price crash risk.

Abstract

Purpose

The purpose of this paper is to empirically analyze whether and how managerial overconfidence affects stock price crash risk.

Design/methodology/approach

Based on a large sample of Chinese non-state-owned firms from 2000 to 2012, this study employs methods including multiple linear regression model, Heckman two-stage treatment effect procedure, firm fixed effects model and event study to clarify the causality relationship between managerial overconfidence and crash risk.

Findings

The authors find that firms with overconfident managers (chief executive officer or board chairs) are more likely to experience future stock price crashes than firms with non-overconfident managers. The effect of overconfidence on crash risk is more pronounced for firms with low transparency, suggesting that firm opacity facilitates overconfident managers’ bad news hoarding activities, which, in turn, increases stock price crash risk. The authors also show evidence that overconfident managers tend to disclose good news in a timely manner.

Originality/value

The authors add to the growing literature on stock price crash risk. Specifically, the authors find that the cognitive bias of board chair plays an important role in the bad news hoarding activities, thereby increasing the likelihood of stock price crash. This study also contributes to the literature that addresses the effects of managerial overconfidence on corporate finance issues.

Details

China Finance Review International, vol. 10 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 29 April 2021

Mahdi Salehi, Arash Arianpoor and Nader Naghshbandi

The main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence

Abstract

Purpose

The main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) and firm risk-taking on the Tehran Stock Exchange (TSE).

Design/methodology/approach

The study’s sample comprises 150 companies listed on the TSE from 2011 to 2017. Risk-taking is calculated as the standard deviation (SD) of stock return. Explanatory factor analysis was performed to calculate the weight of each of the five variables managerial ownership, board independence, chief executive officer (CEO) tenure, board compensation and CEO duality as a proxy for managerial entrenchment. The study by Anderson and Hsiao (1982) was also used to calculate managerial myopia, and the study by Schrand and Zechman (2012) was used to calculate managerial overconfidence.

Findings

The results indicate that the effect of managerial entrenchment and managerial myopia on risk-taking of listed firms on the TSE is positive and significant, implying that an increase in CEO entrenchment is likely to give rise to risk-taking. The authors conjecture that this finding could be due to the investment projects impairing the firm performance in the long run. Furthermore, the effect of managerial overconfidence on listed firms' risk-taking on the TSE is significantly negative. Since overconfidence is one of the traits of narcissism and corporate managers tend to be encouraged and admired, it is implied that they tend to make efficient and low-risk investments that ultimately reduce the firm risk-taking.

Originality/value

Several theoretical studies show that managerial behavior is a determining factor in the economy. One of the reasons which justify the originality of this study is the context and institutional environment. Undoubtedly, managerial behavior (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) is expected to have some significant variations in developing countries compared to prevailing in developed countries, particularly in the Iranian stock market the economic sanctions. Furthermore, due to the direct impact of individuals' psychological and behavioral characteristics on their decisions and the effect of companies' risk-taking on increasing and decreasing shareholders and companies' wealth, this research is essential. Given the function of designed behavioral criteria for assessing risk-taking behaviors, the relationship between managerial attributes and firms' risk-taking is still unclear and investigated in this study.

Details

The TQM Journal, vol. 34 no. 4
Type: Research Article
ISSN: 1754-2731

Keywords

Article
Publication date: 17 August 2021

Bowon Kim and Jaeseog Na

This study examines whether the behavioral attributes, such as overconfidence, of chief executive officers (CEO) and chief operating officers (COO) affect firm's inventory…

Abstract

Purpose

This study examines whether the behavioral attributes, such as overconfidence, of chief executive officers (CEO) and chief operating officers (COO) affect firm's inventory leanness. If they do, how are they interacting with each other? Moreover, incorporating market competition into the analysis, this study explores how the competition moderates the relationship between managerial overconfidence and inventory leanness.

Design/methodology/approach

Using a large panel data of US manufacturing firms between 1998 and 2015, this study measures top managers' overconfident characteristics using stock option information. Then, a panel regression analysis is adopted to test the effects of managerial overconfidence on inventory leanness. Moreover, a moderation model is applied to investigate the interaction effects of market competition.

Findings

Firms with overconfident COOs (CEOs), other circumstances being equal, increase (decrease) the inventory leanness as the market becomes more competitive.

Practical implications

The study suggests that firms should understand top managers' behavioral characteristics to manage inventory efficiently. Collectively, CEOs (COOs) tend to increase (decrease) inventory levels due to their overconfidence as the market gets competitive. Firms should establish a systematic process to be reviewed by diverse stakeholders to deal with managerial overconfidence.

Originality/value

This study is an exploratory study that examines whether and how top management's behavioral attribute relates to a firm's operations performance. It underlines that CEO and COO's overconfident characteristics determine the inventory leanness when market competition is considered. Numerous studies on firm-level strategies emphasized the top managers' overconfidence as a key factor. However, behavioral characteristics at the top management level have rarely been studied in operations management fields. Based on the results, scholars could compare and understand the effects of CEO and COO overconfidence to provide insights into inventory management.

Details

Journal of Manufacturing Technology Management, vol. 33 no. 1
Type: Research Article
ISSN: 1741-038X

Keywords

Article
Publication date: 8 May 2017

Kwanglim Seo, Ellen Eun Kyoo Kim and Amit Sharma

This paper aims to find alternative explanations for the use of long-term debt in the US restaurant industry from a behavioral perspective. The three-fold purpose of the…

1622

Abstract

Purpose

This paper aims to find alternative explanations for the use of long-term debt in the US restaurant industry from a behavioral perspective. The three-fold purpose of the present study is to examine the impact of CEO overconfidence on the use of long-term debt; explore how CEO overconfidence moderates the relationship between growth opportunities and long-term debt; and analyze the moderating role of CEO overconfidence based on cash flow levels in the context of the restaurant industry.

Design/methodology/approach

Using a sample of publicly traded US restaurant firms between 1992 and 2015, this study used generalized methods of moments with instrumental variable technique to analyze the panel data.

Findings

The findings of this study highlight the importance of considering behavioral traits of CEOs, such as overconfidence to better understand the US restaurant firms’ financing behaviors. This study found that overconfident CEOs tend to use more long-term debt when firms have greater growth opportunities and low cash flow.

Practical implications

Given that psychological and behavioral features of CEOs are critical in understanding the variations in corporate financing decisions and capital structure, shareholders and boards of directors of growth-seeking restaurant firms should incorporate the behavioral aspects of overconfident CEOs in the design of long-term debt contracts to mitigate liquidation risk while developing compensation practices that encourage overconfident CEOs to finance growth.

Originality/value

Despite its heavy reliance on long-term debt in the US hospitality industry, prior studies provided mixed findings for the determinants of long-term debt. This study makes a contribution to the literature by offering alternative approaches to examining long-term debt decisions among US restaurant firms.

Details

International Journal of Contemporary Hospitality Management, vol. 29 no. 5
Type: Research Article
ISSN: 0959-6119

Keywords

Article
Publication date: 21 August 2019

Blake Rayfield and Omer Unsal

The authors study the relationship between CEO overconfidence and litigation risk by examining employee-level lawsuit data. The purpose of this paper is to better…

Abstract

Purpose

The authors study the relationship between CEO overconfidence and litigation risk by examining employee-level lawsuit data. The purpose of this paper is to better understand the executive characteristics that potentially affect the likelihood of employee litigations.

Design/methodology/approach

The authors employ a unique data set of employee lawsuits from the National Labor Relations Board – “Disposition of Unfair Labor Practice Charges” – which includes complaints, litigations and decisions. The data spans the years 2000–2014. The authors employ the option-based CEO overconfidence metric of Malmendier et al. (2011) as the primary explanatory variable.

Findings

The authors find that overconfident CEOs are less likely to be subjected to labor-related litigations. The authors document that firms with overconfident CEOs have fewer lawsuits opened by both labor unions and individuals. The authors then investigate the effect of employee litigations on firm performance to understand why overconfident CEOs are less prominent among lawsuits. The authors show that litigations lower corporate investment and value of capital expenditures for responsible firms, which may limit overconfident CEOs’ ability to invest. Therefore, the results may reveal the fact that overconfident CEOs may prefer to align with the interest of their employees to avoid reduced investment opportunities.

Originality/value

The paper makes three main contributions. First, it provides the first large-sample evidence on CEO overconfidence and labor relations. The authors employ data on firm-level labor litigation that contains both the case reason and case outcome. Second, this paper adds to the growing literature of CEO overconfidence and governance practices in the workplace. Finally, the study highlights the importance of employee treatment and explores the impact of labor lawsuits on firm value.

Details

Review of Behavioral Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 10 September 2018

Mahdi Salehi, Mahmoud Lari DashtBayaz and Samaneh Mohammadi Moghadam

The purpose of this paper is to assess the relationship between some management features (management capability, management entrenchment, agency costs and overconfidence

Abstract

Purpose

The purpose of this paper is to assess the relationship between some management features (management capability, management entrenchment, agency costs and overconfidence) and the innovation of companies listed on the Tehran Stock Exchange.

Design/methodology/approach

The study carried out during 2009–2015. A total of 125 companies were selected from eight industries as the sample of study using the method of systematic elimination. A descriptive-correlational design was used in this study and panel data regression models were employed for developing the relationship between research variables.

Findings

The obtained results indicated that managerial ability could foster innovation, while managerial entrenchment could stifle innovation and agency costs and overconfidence have no effect on innovation.

Originality/value

The current study is almost the first project which focuses on the management characteristics and firm innovation in developing countries.

Details

International Journal of Productivity and Performance Management, vol. 67 no. 7
Type: Research Article
ISSN: 1741-0401

Keywords

Article
Publication date: 2 September 2021

Hardeep Singh Mundi, Parmjit Kaur and R.L.N. Murty

The purpose of this study is to understand the impact of the overconfidence of finance managers on the capital structure decisions of family-run businesses in the Indian…

Abstract

Purpose

The purpose of this study is to understand the impact of the overconfidence of finance managers on the capital structure decisions of family-run businesses in the Indian scenario. Furthermore, this study aims to demonstrate that measurable managerial characteristics explain the capital structure decisions of managers.

Design/methodology/approach

The qualitative approach to research, which aims at understanding a given phenomenon among the experts, is followed. Semi-structured interviews are conducted with 21 overconfident finance managers of family-owned businesses. Content analysis is used to analyse the collected data regarding capital structure decisions into several themes to fully explore the issue in the Indian scenario.

Findings

In terms of preference for cash or debt, most of the responding overconfident finance managers of family-run businesses agreed that cash is the preferred source of financing over debt financing. This is due to the biased behaviour of overconfident managers, who consider lower availability of debt as a reason to prefer cash over debt financing. The present study reports that overconfident finance managers prefer short- to long-term debt financing. These managers raise certain practical issues, such as stringent debt terms and inflexible repayment schedules, that arise in relation to the long-term debt market. The study also finds that overconfident finance managers do not fully use tax savings. Respondents reported a lack of access to the debt market and a lack of expertise in capital structure decisions as factors in these capital structure decisions. In addition, the study explores various factors, such as the role of government, the Central Bank of India and industry practices, in relation to capital structure decisions. The study finds that the capital structure decisions of these overconfident finance managers are suboptimal because of the presence of overconfidence bias.

Research limitations/implications

This study gathers information from respondents who are finance managers, not top-level managers, of family businesses; the decision not to interview the higher-ranking managers is a potential limitation of the present study. Another limitation is the small number of respondents in a specific firm size. Because of these factors, the generalisability of the findings of this study will obviously be restricted.

Practical implications

The present study has several practical implications. The first is the recognition of overconfidence bias as it affects the decision-making of finance managers. Executives, especially finance executives, will benefit from the recognition of overconfidence bias and will understand how the presence of such bias impacts corporate decision-making. Managers will understand that bias leads to faulty decision-making. The study will provide indirect feedback to policymakers and regulators in terms of understanding the role of macroeconomic variables in economic decisions. The qualitative approach followed in the present study may enhance the understanding of capital structure decisions from a psychological perspective. The majority of studies in the review of literature adopt quantitative approaches; so the qualitative approach adopted here represents a methodological innovation, and it may provide a deeper understanding of the matter.

Originality/value

The existing literature includes quantitative research aimed at understanding the impact of CEO overconfidence on various corporate policies such as capital budgeting, mergers and acquisitions, dividend policy and capital structure decisions. Quantitative research into the presence of overconfidence bias among executives and its impact on corporate policies returns mixed results. To fulfil the need for studies of overconfidence bias among executives with practical implications, this study explores the presence of overconfidence bias among finance managers in family-run businesses and investigates the impact of overconfidence on capital structure decisions.

Details

Qualitative Research in Financial Markets, vol. 14 no. 3
Type: Research Article
ISSN: 1755-4179

Keywords

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