Research On The Influence Of The Degree Of Managerial Confidence On Non- Efficiency Investment

In the process of enterprise’s management, investment is very important decision-making link which directly affects the enterprise’s value, while the enterprise’s value depends on the efficiency of enterprise’s investment. But, in current market, most enterprises exist the behavior of non-efficiency investment which deeply influence the performance of enterprises. Traditional researches explaining non-efficiency investment are also from the point of principal-agent theory and information asymmetry theory. However, these theories are established on the assumption of "reasonable person". In the 1980 s, with the development of behavioral finance,scholars have found that people are not completely rational, when they make decisions, they are influenced by the psychological factors and their own feelings, which lead to the loss of the enterprise value. And in many irrational psychological characteristics, as the highlight of the performance, overconfidence impacts on the enterprise investment decisions deeply. Therefore, scholars in increasing number have begun to explain and study non-efficiency behavior by using the overconfidence variable.Through the review and summarize of the previous papers, we find that the relationship between managerial overconfidence and the efficiency of investment is not simply the linear relation. On the one hand, some scholars believe that the relationship between managerial overconfidence and the efficiency of enterprises’ investment present the positive correlation, to be specific, when the free cash flow is sufficient, overconfidence makes the managers over estimate the returns and under estimate the risk which results in over investment; what else, overconfidence can also make the managers think the outside underrates the program value, so the managers may give up the program that may bring cash flow to the enterprise, at last, this may turn into the behavior of under investment; Both of these behaviors show that overconfidence increases the degree of non-efficiency investment; On the other hand, studies have considered that managerial overconfidence has negative effect on the non-efficiency investment, because they think moderate overconfidence will decrease the behavior of lack of the investment caused by the risk aversion, which to some extent inhibited the inefficient investment behavior, so it decreases the degree of non-efficiency investment. Based on this, this paper argues that the relationship between managerial overconfidence and the efficiency of enterprises’ investment is not simply the linear relation, and the reason of this is the regulating effect of free cash flow.This paper selected the sample from Shanghai and Shenzhen listed companies in 2009-2014, using the changes in the number of shares and the top three executives relative remuneration as two ways to measure manager overconfidence, and screening the overconfident samples to make regression. Through empirical testing, we found that the relationship between managerial overconfidence and the efficiency of enterprises investment shows non-linear relation, and relative to insufficient investment, the non-linear relationship between managers overconfidence and overinvestment is more obvious. Then, we test the regulatory role of free cash flow, we found that overconfident managers are more sensitive to the free cash flow, and the sufficient cash flow will promote the non-efficiency investment behavior. At the end of the paper, in order to confirm the consistency and robustness of the result, we made robustness test, and the result is satisfied to the previous hypothesis.In this paper, we mainly emphasized the relationship between managerial overconfidence and the efficiency of enterprises investment shows non-linear relation,the result of this study has important implications for the selection of managers, which can effectively avoid the irrational behaviors that caused by the overconfidence managers. What’s more, the results for the regulating effect of the free cash flow also reveal the enterprise should be much more pay attention to the management and allocation of the free cash flow, so as to make the enterprise make more effective investment.