Study On The Relationship Among Managerial Overconfidence, Corporate Risk Taking And Firm Values

Classic economics regard human beings as completely rational economic man and people pursues the maximum effectiveness of the aims. The study of previous scholars on the decision-making by managers on the corporate value is based on the hypothesis of rational person. However, with the development of behavioral finance theory, people are gradually aware of that managers are not completely ration and they may make many irrational behaviors during decision-making, which affects the realization of maximum firm value. Scholars take the influence of mental factors on managers into the consideration of managers decision-making model and found that overconfidence mentality is the most stable and typical feature of managers.Previous researches mainly attach importance to the direct influence of the managerial overconfidence on the investment, funding decision and acquisition of the corporate and the indirect influence on the firm performance and firm value. Some scholars think that the overconfidence of managers can lead to the over-investment of corporate, which results in the financial crisis of the corporate. Some other scholars think that the over-confidence of scholars can put more emphasis on the satisfaction in their work so that they would work harder and reduces agent costs and increase firm value. Besides, some scholars propose that there is a non-linear relation between managerial overconfidence and the firm value. Proper overconfidence can be helpful for the realization of firm value while the excessive over-confidence can be harmful for the firm value.By referring to the previous study conclusion, this paper selects the corporate risk-taking as medium variants so as to testify the non-liner relation between the overconfidence of managers and firm value. This paper selects the Shanghai and Shenzhen A-share listed companies from 2009 to 2013 as research object, Tobin’s Q value to measure firm value, Earnings volatility(Standard deviation of ROA each three years) to measure the corporate risk-taking level, the income of the first three senior managers and total compensation ratio to measure the managerial overconfidence so that it gets 4252 overconfidence sample for Regression analysis. First, by regression analysis we examined the relationship between managerial overconfidence and enterprise value. Second, by regression analysis we examined the influence that managerial overconfidence exert on corporate risk-taking. Finally through regression analysis we examined the corporate risk-taking’s mediating effect plays between managerial overconfidence and enterprise value. To return to the above-mentioned conclusions more objective, this article select the way the replacing with an argument to proceed the robustness tests. Through the above analysis and tests, the paper obtained the conclusion is as follows:(1) the managerial overconfidence and firm values presents inverted U Shape non-linear relation;(2) the managerial overconfidence presents positive relation with the corporate risk-taking level;(3) corporate risk-taking level has been medium relation between the managerial overconfidence and firm values.The conclusion indicates that managerial overconfidence not only has negative effect for the realization of firm value but also varies with the changes of overconfidence degree. The managerial overconfidence has optimal level. Medium overconfidence is positive for corporate while excessive overconfidence injures the firm value. The conclusion of my paper also offers new empirical evidence to the non-linear relations between managerial overconfidence and the firm value.