Managerial Overconfidence Heterogeneity,Corporate Governance And Enterprise Investment Deviation

Investment decision is one of the most important decisions of an enterprise.It is the main motivation of enterprise growth and the basis of future cash flow growth.Investment can directly affect the profitability and the future development's direction of the enterprise.In the past two decades,domestic and foreign studies of behavioral finance have shown that managers' psychological bias of overconfidence have an impact on the investment decisions of enterprises.On the one hand,managerial overconfidence can increase the sensitivity of investment to cash flow,which will aggravate the degree of over-investment and under-investment in the case of abundant and insufficient cash;on the other hand,owing to the unique psychological characteristics of overconfident managers,they can increase the investment scale of enterprises.In the above two kinds of research,the former is combined with the financing theory to examine the moderating effect of managerial overconfidence in enterprise investment,while the latter is based on the psychological characteristics of managerial overconfidence,to examine its main effect on investment.Although there are differences between the impacts on investment bias,the above two types of research examine the impact of overconfidence on investment decisions as a kind of homogenous psychological bias,which show the psychological characteristics of “overestimating returns and underestimating risks”.However,cognitive psychology holds that overconfidence has four different sources,namely “better than average”,“control illusion”,“calibration errors” and “overoptimism”.Overconfidence from different sources has different psychological characteristics,which has different effects on enterprises' economic decision-making.Therefore,based on the existing research results of behavioral finance and psychological research,this paper attempts to distinguish the source and degree of overconfidence.By studying the influence of managers' overconfidence on deviation in Listed Companies in China,the paper provide a basis for understanding and managi ng investment deviation in enterprises.Firstly,based on the research results of cognitive psychology and the availability of empirical data,this paper divides managerial overconfidence into two sources: better than average and control illusion.Overconfident managers who are “better than average” often overestimate the relative position of individual abilities in the group,thus overvalued the returns in investment decisions.Overconfident managers from “control illusion” often overestimate the individual's ability to control investment projects,thus underestimating the volatility of returns,which manifested as the feature of “underestimation of risk” in investment decision-making.This paper uses the portfolio of the board of directors and the relative remuneration to measure the overconfidence from the two sources,and explores the influence of different sources of overconfidence on investment bias.Secondly,combined with the existing research on the degree of overconfidence,based on the heterogeneit y of sources,it further differentiates the different effects of overconfidence.Thirdly,in order to futher conform to the reality of enterprise management,considering the different sources and strengths of overconfidence together,this paper examines the different effects of different types of overconfidence on over-investment and under-investment.Finally,combined with the impact of different types of overconfidence,this paper explores the governance effect of the existing corporate governance mechanism on the investment bias caused by overconfidence,so as to provide reference for improving the existing corporate governance mechanism of Chinese enterprises,giving play to the beneficial role of managers' overconfidence and restraining its adverse effects.The study finds that either the overconfidence from “better than average” or from “control illusion” can increase over-investment and reduce under-investment,but the influence of overconfidence from different sources on investment bias is different.Because the overconfident managers from “better than average” are based on overestimating their individual abilities,they usually have the psychology of “decision-making commitment” and “commitment upgrade” in the process of investment decision implementation.Therefore,compared with “control illusion” overconfidence,it lead to a greater degree of over-investment.After further investigation of the degree of overconfidence,it is found that only the weak overconfidence of “control illusion” can promote the improvement of investment efficiency of enterprises,while the weak “better than average” overconfidence does not have such effect.Whether the strong overconfidence from “control illusion” or “better than average”,they have a dual impact on investment bias,that is,while aggravating the over-investment,restraining the under-investment.Considering the sources and degree of overconfidence together,we find that if managers have both sources of overconfidence,the impact on investment bias is higher than that of single source.As long as managers have psychological biases from both sources,if the degree of either source is strong,their overconfidence can cause both an increase in over-investment and a decrease in under-investment,besides,the impact on over-investment is higher than that on under-investment.Further research finds that the internal corporate governance mechanism has limited correction effect on managers' overconfidence,while the external corporate governance environment has a strong regulatory effect on investment bias caused by different types of overconfidence.With the increase of market competition,the effect of managerial overconfidence on the aggravation of over-investment and the restraint of under-investment can be strengthened.This study can promote the development of the theory of managerial overconfidence to a certain extent,and further improve the management practice of enterprises.Firstly,combined with psychological research,this paper explores the different effects of the sources,strengths and heterogeneity of overconfidence on over-investment and under-investment,which is a useful exploration for the study of overconfidence.It is important to identify different types of overconfidence and to play a positive role of overconfidence and restrain its negative effects in improving the management practice of enterprises.Secondly,unlike foreign research conclusions,internal corporate governance mechanism plays a limited role in correcting managers' psychological bias,so it should further strengthen the effectiveness of corporate governance in behavioral governance.Finally,the selection and assessment of managers should be combined with the internal resources of enterprises and the characteristics of the industry environment,so as to maximize the positive role of managers' overconfidence and reduce its negative impact.