Managerial Overconfidence And Corporate Financing Policy

Financing decision is one of the three major financial decisions, having important influence on the value of the company. Study of enterprise financing decision has been a hot point in academic for a long time. Since MM theory was presented, researchers have done a lot of research around capital structure decision, and proposing trade-off theory, agency theory, signaling theory, pecking-order theory and so on. However, as the economy and studies develop, people find there are some "anomalies" in economy activities, which can’t be explained by traditional financial theories, so that rational-economic assumption is questioned. Behavioral finance breaks down rational-economic assumption, researching on corporate finance from irrational perspective. It provides a new idea and direction for related research. The research finds that irrational behavior is widespread, and overconfidence is the steadiest finding in irrational behavior. Research on overconfidence divides into investor overconfidence and managerial overconfidence. Research on managerial overconfidence is less. Manager is the company policy maker and implementer, having high status and power, so that they are more prone to be overconfident, and resulting in value deviation. Therefore, research on managerial overconfidence and corporate financing decisions is significant.The difficulty of research on managerial overconfidence is how to measure managerial overconfidence. This paper references other researches, and proposes measure method of managerial overconfidence based on performance forecast deviation. If listed company’s real net profit is below the lower limiting value of estimated net profit, it is identified as managerial overconfidence. This paper reviews related researches at the theories part. And pointing out that overconfident managers usually perform actively, and they have a better reputation, so that they gain trust of creditors more easily. As for the empirical part, this paper chooses China’s listed companies during 2010-2014 in Shanghai and Shenzhen A-share markets as samples, and chooses asset-liability ratio, long term debt ratio, short term debt ratio to define capital structure, chooses floating debt ratio, funded debt ratio to define maturity structure, then empirically tests managerial overconfidence and corporate financing decision. And redefine managerial overconfidence with executive compensation ratio to make a robustness test.The results of the study are as follows:(1) overconfident managers defined by performance forecast deviation account for about 19%, showing that there are quite a few managers overestimating company performance. (2) it is significant positive correlation between managerial overconfidence and corporate debt level, that means managerial overconfidence has a significant impact on corporate capital structure decision, resulting in a higher debt level. (3) it is significant positive correlation between managerial overconfidence and corporate maturity structure, that means managerial overconfidence has a significant impact on corporate maturity structure, and overconfident managers are prone to long-term debts.