Political Relations, Overconfidence And Corporate Performance

The hypothesis of Economic Man is the foundation of Western classical economics, butin the beginning of being raised, it constantly being questioned. Herbert Simon believes theindividual’s time, effort and capacity is limited, so he or she can’t be completely rational, butbounded rationality. And the decisions also can’t be the best, but at the "satisfactory" level.Subsequent studies introduce microscopic individual’s psychological motivation into thestudy of market behavior’s bias and anomalous. Overconfidence is one of the importantresearch results. Numerous studies found that overconfident managers overestimate their owncapabilities to overestimate some project’s cash flow, and then invest in a negative NPVprojects, leading to over-investment and decrease of enterprise performance.Meanwhile, in addition to the internal managers overconfidence, Chinese enterprisesalso generally exist intricate relationship with the government, the private enterprisemanagers often served by NPC deputies and CPPCC members to get political relations, so asto win projects of higher profitability, government subsidies, chance of getting into hemonopoly industries and so on. No pains,no gains, the manager also need to pay someprice. Mostly, the company with political relations have to expand their scale of investment topromote the growth of local GDP and maintain employment.Therefore effect of politicalrelations to the company’s performance is often blurred. Obviously, overconfidence,which isthe internal motivation, and political relations,which is the external stimulus affect together,willmake a complex changes of the performance of private enterprises.In this paper, according to the date of listed companies from2007to2012, and the useof corporate investment as an intermediary variables to analyzed the impact of politicalrelations and overconfidence on the performance of private enterprises. The results show thatoverconfidence of manager can lead to over-investment and promote business expansion ofenterprises, and over-investment will further lead to lower corporate performance. However,under conditions of overconfidence, companies with political relations can achieve higherperformance, because political relations significantly affect the behavior of enterprisesexpansion, but does not lead to over-investment. Thus, political relations can get morerevenue for businesses from the fast expansion.