An Empirical Research On The Impact Of Managerial Overconfidence On The Company’s Capital Structure Decision

The concept of behavioral finance had been proposed by Burrell and Bauman since they first applied behavioral psychology to economics so as to explain economic phenomena in1951. They held that the measurement of income from investment not only should establish and apply quantitative investment model but also should conduct necessary analysis on investors themselves, namely, their intrinsic aspects of human nature. The MM theory co-published by Franco Modiligani and Merton Miller in1958was regarded as the starting point of modern corporate finance theory. However, MM teory is excessively dependent on such assumptions as efficient market, investor theory and complete interest arbitrage theory etc., which is inconsistent with the reality. For half a century, plenty of theoretical studies have been performed concerning the releasing strict assumptions of MM theory and scholars have proposed trade-off theory, pecking order theory, signal transmission theory and free cash flow hypothesis etc. to explore the influential factors on enterprise capital structure. These studies mainly followed the framework of neoclassical economics analysis on the condition that managers and investors are rational. After the1980s, scholars began to realize that the irrational factors of managers and investors might impact corporate capital structure, and from then on the achievement of psychological researches were gradually applied to the theoretical study on corporate capital structure, loosening the assumption of rational economic man and getting closer to current state of capital market. It opens a new perspective and successfully explains the so-called "anomaly" in some classical theories on company. The emergence and development of behavioral finance theory has aroused extensive attention in academia. Under the circumstances of special system and background in China, the study on the influence of the psychological behavioral biases of the administrator with managerial overconfidence on the corporate capital structure is relatively deficient. Under the basic framework of behavioral finance theory and on the basis of theoretical analysis, this these examines the influence of managerial overconfidence on the corporate capital structure decision based on the data of listed companies from2010to2012, drawing some important conclusions and coming up with relevant suggestions. The thesis consists of the following five chapters:The first chapter is the introduction. It generally introduces the study of this thesis and expounds the research background, subject selection and the significance of this thesis, then introduces the research content, technical route and research technique, and briefly reviews the innovation and deficiency of this research.The second chapter and the third chapter are the literature review and the theoretical analysis on the relationship between managerial overconfidence and corporate capital structure decision. Firstly, it introduces the definition and performance of managerial overconfidence, probes into the causes for and the comments on managerial overconfidence and summarizes the domestic and foreign researches on managerial overconfidence metrics. Then, this thesis teases the available literature on the impact of managerial overconfidence on enterprise capital structure, including the influence of managerial overconfidence on the trade-off theory, pecking order theory, debt maturity structure theory, capital allocation and enterprise investment. Finally, it carries out a brief analysis on research results and shortcomings of some studies. This chapter lays a solid foundation for the research hypothesis and empirical test of the third chapter.The forth chapter is the empirical test. Two hypotheses based on the theoretical basis of the second chapter are put forward. By means of empirical analysis, this part comprehensively inspects the influence of managerial overconfidence on the capital structure of listed companies in China. The specific content is as follows:first, the measurement index of managerial overconfidence in studies at home and abroad can be obtained according to the comment and the analysis of previous chapters and the rationality will be demonstrated based on the design of the index of enterprise M&A frequency and the managerial overconfidence of relative remuneration. Next, it adopts the regression analysis to examine the impact of managerial overconfidence on the choice of list companies’ capital structure and debt maturity structure and finally comes to relevant conclusions.The fifth chapter comes to research conclusions and puts forward some policy recommendations. On the basis of theoretical analysis and empirical test in previous chapters, it makes a summary on research conclusions of this study and proposes relevant policy recommendations based on the research results.This thesis strives to abandon the assumptions of rational decision makers in traditional economics, examines the impact of managerial overconfidence on corporate capital structure from the perspective of behavioral finance, verifying the existence of the significant impact of managerial overconfidence on corporate capital structure and enriching the research content of traditional enterprise capital structure decision. Studies on behavioral finance always focus on two aspects, irrationality of investors and irrationality of managers, while available studies mainly focus on the irrationality of investors. In contrast, studies, especially the empirical studies on the influence of the irrationality of managers largely lag behind. This thesis employs the latest data for further empirical research to expand the research content and approach of behavioral finance.