'Irrational Managers Hypothesis' And The Evidence From Industrial Differences

This dissertation is about 'irrational managers hypothesis' and the evidence from industrial differences.'Irrational managers hypothesis' is a branch of behavioral corporate finance,which replaces the traditional rationality assumptions with more realist in behavioral assumptions.'Irrational managers hypothesis' assumes that managers have behavioral biases,but retains the rationality of investors.My discussion centers on the biases of overconfidence and I think that managerial overconfidence can account for corporate investment distortions.Overconfident managers overestimate the returns to their investment projects and view external funds as costly.Thus,they overinvest when they have abundant internal funds,but curtail investment when they require external financing.I test the overconfidence hypothesis,using cross-section data on personal portfolio and corporate investment decisions of the list companies.I identify CEOs whether overconfident or not by their habitual acquisition of company stock.I find that investment of overconfident CEOs is significantly more responsive to cash flow.As part of microeconomics,the traditional corporate finance follows a basic rational hypothesis.However,the basis hypothesis has been attacked by the reality non-stop,scholars have been inspired by limited rationality has been advanced by Simon and Williamson,and try to relax the rationality hypothesis by using psychological knowledge,then form Behavioral Corporate Finance.With the rise of behavioral finance,financial economists in recent years begun to apply behavioral finance theory to the study of corporate finance,and thus develope the "Behaviroal Corporate Finance".And a major part of this area is "irrational managers hypothesis",this article will summarize the research in this area, and test the basic situation of listed companies in China.For investors,managers of the behavior of corporate finance theory break the traditional corporate finance theory,from the perspective of look at the participants of financial markets and the psychological and behavioral impact of corporate manager in the financial decision-making,that is a useful addition and challenges to traditional corporate finance.China's capital market investors and corporate managers,compared with developed capital market,is not mature enough and China's capital market competition mechanism itself is not perfect,low degree of market efficiency do not meet the traditional assumption.Study the act of corporate finance and applied to China's capital market is timely and necessary.Theoretical Analysis of this paper majorly use the information asymmetry theory,signaling theory,agency theory and some knowledge of psychology. Empirical analysis used analysis of variance,non-parametric tests and multiple regression analysis of parameters such as analysis and non-parametric analysis.This article summed up the behavioral corporate finance research firstly, focusing on analysis of "irrational managers hypothesis","irrational manager" refers to:the managers believe they can make to maximize the value of the company,but the excessive optimism or excessive self-confidence deviate from the target. Managers in the company is indeed the objective of maximizing shareholder value, so the company's governance structure is ineffective,and if the board has its own bias and subject to its manager,the company's governance structure will not solve the problem but may create more problems.Then this article will be applied to China's capital markets,on China's capital markets to some "unreasonable" to provide a simple explanation of the phenomenon.After theoretical analysis,we found whether the optimal capital structure exist or not,managers of over-confidence will affect the company's investment decisions. After the above theoretical analysis,I study Shanghai and Shenzhen stock exchange using the data from the Shanghai and Shenzhen stock exchange in 2007 annual report.I process the data with Excel and SPSS 13.0.Researching on sample of manufacturing indicates that the company's investment activities and free cash flow high related which show that manufacturing companies distort their investment,and further analysis showed that this distortion is over-investment,but we can not find the over-confident relating to the irrational managers.In order to compare the different characteristics of investment activities in different industries,I further account information technology industry companies into the sample.I found that the information technology industry companies' investment activities also hold a high degree of correlation with the cash flow indicating the existence of investment distortion,but it is different with manufacturing companies,it is a under-investment.The differences between these two industries is mainly caused by two reasons. Firstly,the information technology industry companies' investment activities is nat necessarily reduce more cash flow and further business growth of future performance,but the company's investment activities in the manufacturing companies in generally lead to high productive capacity of the company which directly related to the future performance of company.Secondly,because of the information technology industry companies' operating volatility and the characteristics of asymmetric information,the managers of such companies more vulnerable to excessive self-confidence.Based on the above two considerations,the managers of information technology industry companies are likely satisfied with the existing business activities and reducing the company's investment activity,the company financing difficulties also inherent led to insufficient investment of information technology industry listed companies.This is different from the manufacturing companies,manufacturing companies' over-confident managers may have the dream of building a business empire,the realization of this dream must be rely on sufficiently investment.Excessive self-confidence manager is likely to over-estimate the return of companies' investment,which further contributed to the company's investment activities.The empirical analysis is based on the combination of these two types of companies to provide an appropriate corporate governance recommendations and I hope to contribute to the further theory and practice study.