Relevance Study Of Managers, Overconfidence And Investment Decision Based On Agency Cost Theory

The traditional rational economic man thinks hypothetically that People alwaysmake the rational decisions. Rationality still can let the decision makers analysis andchoose all available information, so that they can make the best decision at last. Somepsychologists raise doubts about fundamental assumption which is the decisionmakers’ rationality in traditional economics. Behavioral economists also bring thetheory and research paradigm of cognitive psychology into the economics. Throughthe research they find that decision behavior of deciders is not only drove by theeconomic benefit, but also influenced by the subjective psychological factors such asinstinct, mood, prejudice and the feeling. These propositions are unfolded by the coreof the individual cognitive biases. And so far, overconfidence is the most focusedcognitive biases in Corporate Finance.The growth environment of the listed companies in China is different from thewestern developed countries. The major listed companies are transformed by thestate-owned enterprise. View our special system background, this paper’s measures ofthe overconfidence about managers is different from the existing literature. I use thetwo explanatory variables which is the top three executives’ salary and the changestop executives’ shares. Agency problem is different between the state-owned listedcompany and non-state-owned listed company. The difference of agency cost willhave an affect on the relationship between the managers’ overconfidence and theinvestment behavior. I will discuss the new perspective by the paper. In this paper, Iused the Eviews6.0and Excel software through the2008-2010year of all listedcompanies in the Shanghai and Shenzhen stock exchange as a sample data. At last, Iget the following three conclusions. Firstly, there is a significantly positive correlationbetween the listed company managers’ overconfidence and the sensitivity of theinvestment cash flow, and this positive correlation is a notable performance in thestate-owned listed companies. Secondly, the agency cost of the state-owned listedcompanies is significantly higher than the non-state-owned enterprises’. Thirdly, onlywhen the agency cost is higher than the average of the agency cost samples in thelisted companies, managers’ overconfidence cause excessive investment will beobvious.