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We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

This chapter explores the phenomenon of managerial overoptimism, focusing on the cognitive underpinnings of the mechanisms that generate this bias. It develops a formal model of probability estimation that is inspired by the biological (cognitive neuroscience) evidence on associative information processing in the brain. The model is able to make novel, testable predictions about managerial overoptimism. It is able to parse out three mechanisms that could lead to overoptimism, as well as predict boundary conditions on when these effects should be observed and when the opposite (a pessimistic bias) should be observed instead. Furthermore, it predicts that under certain conditions, attempts by managers to “debias” their estimates might exacerbate the overoptimistic bias.

The purpose of this paper is to study merger momentum and its driving factors in China by sampling 376 listed bidders from 2008 to 2013.

The empirical model captures the dependency of market reaction on recent merger and stock market states. The independent variables are designed from two dimensions, i.e. at the level of market-wide as an integral and bidder-specific as individuals. Furthermore, both the market and bidding firms contain merger momentum and market momentum, respectively.

The empirical results show that there is merger momentum in the market. Particularly, merger momentum is significant both in short run and long run for the mergers with cash payment, which supports the synergy effect. It also implicates the mergers with stock driven by investor sentiment. Besides, investors’ over-optimism is significant in the bull markets while managerial hubris is found in the bear markets.

The driving factors for merger momentum in China are complex. Three impacts with different effects interact with one another. They are investor sentiment and managerial hubris with negative effects resulting in reversal abnormal return in the long run, and synergies with positive shocks resulting in no reverse at all. The limitation of the paper is insufficient analysis of the mergers financed by stocks, which will be the focus for future study.

The conclusions of the study help to intensify the understanding of the immature and unnormalized capital market in China. The empirical analyses give some inspiration and suggestions to three parties in the market, i.e. investors, bidding firms and regulators, respectively.

There are three contributions. The first one is to provide a novel model to identify how these different effects work on the merger momentum. The second one is the measurement of investor sentiment from different perspectives. The last but most important one is the new findings with novel explanations, which proves that the impacts on merger momentum are complex.

The purpose of this paper is, from a resource accumulation and resource allocation perspective, to examine the variant effects of government subsidies among firms with varying levels of market power and to test how industry competition moderates the relationship between market power and allocative efficiency of government subsidies.

This study explores the relationship between government subsidies and firm performance from a resource-based view. The authors study the moderating role of market power and three-way interaction between subsidy, market power and industry competition on firm performance. The authors test their hypotheses using a sample of Chinese A-share manufacturing firms from 2006–2019. The authors apply firm-level panel data regressions and conduct a series of robustness tests. The marginal effect of market power and industry competition is explored via three-way moderator effect models.

This study finds that government subsidies are negatively related to firm performance. Market power, on average, strengthens the negative effect of government subsidies on performance, but such a reinforcement effect is neutralized when industry competition is intense. Government subsidies are least efficiently used when firms have market power and industry competition is low. In addition, the authors use different forms of firm performance and a various of robustness tests to verify their assumptions.

This paper contributes to the literature as follows. First, the authors look into subsidy–performance problem from the perspective of the resource-based view and contribute to explaining and mitigating the divergence of current findings on the subsidy–performance relationship. Second, the authors introduce market power and industry competition as moderators to study how resource allocative efficiency affects the subsidy–performance relationship. Third, the authors propose that managerial incentives have played an important role in the allocation of government subsidies, which enriches management practices.

Making rational and undistorted corporate investment decisions is critically important to organisations. “Scientific” investment appraisal can play a central role, particularly setting the hurdle rate. Empirical research reveals that actual rates generally exceed organisations’ cost of capital – the so-called hurdle rate premium (HRP) puzzle. Allowing for bounded rationality of corporate decision-makers, the purpose of this paper is to mobilise the retrievability cognitive bias as one explanation of this paradox.

A systematic structuring and investigation of the legacy of eight scenarios, representing “correct” and “incorrect” decisions on “good” and “bad” proposals, is used to explain the inconsistency between normative capital investment theory and actual practice.

Decision makers’ cognitive processes based on informal perceptions, strengthened by the scope of formal post-audit routines, provide a plausible explanation why investment decision makers tend to systematically set hurdle rates too high.

The findings have still to be explored in more depth by fieldwork and experimental research.

The policy implications of this study are that corporate success could be enhanced by making executives aware of the HRP phenomenon and of its behavioural causes; also by including significant rejected investment proposals in the post-audit programme and communicating the opportunity cost of “false negative” decisions on proposals not adopted.

The paper provides a new explanation for a recognised phenomenon: Allowing for bounded rationality of corporate decision-makers, the paper applies research on a cognitive bias to the setting of the hurdle rate in investment appraisal.

The purpose of this paper is to develop a theoretical framework to answer the following question: What are the consequences of sunflower behavior as well as spread behavior for how asset-liability management is administrated in a life insurance company?

This paper takes into account the following: the chief executive officer (CEO) of a life insurance company confirms the board of directors’ belief – the preference of the like of higher return relative to the dislike of higher risk; the authors call such behavior sunflower management; the life insurance policyholder is entitled to a guaranteed interest rate and a participation percentage of the company’s investment surplus; and the authors examine the optimal insurer interest margin, i.e., the spread between the loan rate and the guaranteed rate.

Sunflower management translates into lower utility for the CEO and makes the CEO more prudent to risk-taking at an increased insurer interest margin for the provision of life insurance contracts. The effect of the guaranteed rate on the margin is ambiguous and depends on the level of guarantee itself. An increase in the participation level decreases the CEO’s loan risk-taking at an increased margin. It is shown that a trend toward higher return like of the board’s belief produces a corresponding trend toward the CEO’s decreasing risk-taking when the return like is revealed strongly. The results indicate that sunflower management as such is an important determinant in ensuring a safe insurance system.

This is the first paper to construct a contingent claim model to evaluate the expected value of the CEO’s utility function defined in terms of the equity returns and the equity risks of a life insurance company. The model explicitly considers CEO sunflower behavior, CEO spread behavior and the limited liability of shareholders.

While the existing studies largely suggest that valuation uncertainty benefits acquirers, who apply discounts to targets' value attributable to information asymmetry, the authors argue that the opposite may be the case.

Through multivariate econometric analysis of transaction data, the authors establish the link between the degree of valuation uncertainty measured by targets' track of public listing and acquisition premia. The authors use text-mining tools to measure acquirer–target similarity and control for its role in intermediating the posited empirical relationships.

Having analyzed 618 acquisitions involving listed targets from China, the authors find that acquirers pay higher valuation premia for the more recently listed and relatively younger companies than for those with a longer history since floatation. Similar patterns apply to valuation multiples. Higher valuations are partially attributable to premia for control, as acquirers are likelier to buy a majority stake in the recently listed firms, especially if the latter are similar to them. Such transactions take less time to complete and involve a transfer of larger share blocks despite the higher degree of information asymmetry and a frequent lack of targets' operational profitability. The authors also observe a significant premium for target–acquirer similarity: acquirers appear to rush deal completion due to possible overestimation of targets' potential and familiarity bias.

The authors show that acquisition premia may be driven by acquirers' proclivity to place risky investment bets on the growth potential of opaque targets. This pattern may partially explain frequent failures of mergers and acquisitions (M&A).

The purpose of this study is to examine what makes some firms, but not others, see a crisis as an opportunity to become entrepreneurial. Specifically, it examines how two key capabilities for durability—(unabsorbed) slack resources and external market networks—influence small and medium-sized enterprises (SMEs)’ “opportunity confidence”, a term recently coined to denote the subjective assessment of the extent to which a crisis is a good (bad) basis for entrepreneurial activities, such as the introduction of new products/services and new market entry.

Analysis of hand-collected survey data from 138 SMEs in Greece — a country hit hard by the 2008 economic crisis.

The findings reveal that an SME's number of network contacts has a positive effect on opportunity confidence, whereas firm slack resources lack a direct effect. It is, in fact, at low levels of firm slack resources that network returns are higher, especially for older firms. An extension to the main analysis also shows that opportunity confidence is linked to firm sales growth.

Understanding what makes some firms, but not others, see a crisis as an opportunity will help build an extensive and solid knowledge base and get ready for the next big (or small) crisis, which is inevitable to occur. Besides the grants and subsidies that policymakers often provide to SMEs in times of crisis, they may also need to consider organizing actions that support the extraversion and networking of SMEs—that can be done in a variety of ways due to the rise of teleworking and online collaboration platforms since the onset of the recent COVID-19 pandemic.

This paper draws linkages between the “external enabler perspective” and the burgeoning resilience literature and illustrates empirically what makes some SMEs, but not others, view an economic crisis as a good basis for entrepreneurial activities—that is a manifestation of early-stage entrepreneurial behavior and a necessary condition before taking entrepreneurial action in times of crisis. By so doing, this study extends research on resilience that has explained the role of “capabilities for durability” as a means of surviving through a crisis by revealing that these capabilities do not necessarily translate into capabilities for renewal that will help firms to bounce forward in response to the crisis. It also points to the “dark side” of capabilities for durability and, by implication, of resilience.

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.

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.

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.

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.