An Empirical Study Of The Relationship Betweeen Managers' Overconfidence,Internal Control And Firm Value

With the development of behavioral finance theory,scholars have come to realize that the limitations of traditional financial theory based on the assumptions that manag-ers are completely rational cannot be ignored.Managers are important leaders of firms to integrate and allocate varieties kinds of resources and establish firms'development strategy.Each of their major decisions can make a crucial influence on firm value,es-pecially irrational managers.Based on the value management theory,enterprises regard achieving value maximization as the ultimate goal and strengthen the capabilities of corporate governance constantly.The core of corporate governance is internal control.A good internal control plays a very positive role in the enterprise management which promotes the realization of value maximization.Based on the above,this article chose overconfidence;the most common characteristics of irrational behavior,to study how these irrational behaviors will affect the firm value and how to use a reasonable and ef-fective way to constrain managers'overconfident behavior.This paper analyzed the in-ternal relations between managers'overconfidence,internal control and firm value.In this paper,the combination of normative research and empirical research is used to analyze and test the relationship between managers'overconfidence,internal control and enterprise value.Managers'overconfidence comes from their own over-optimism,control of hallucinations and self-attribution bias,affecting their investment decisions,financing decisions,dividend policies and other major decisions,and thus affecting the firm value.Internal control through establishing the concerning system implements ef-fective control in the enterprise at all levels of business activities to improve business efficiency and effectiveness,and promotes firm value maximization.In the progress of the implementation on internal control activities,managers as part of the stakeholders who need to be checked and balanced by internal control,their decisions will be subject to internal control constraints.And the supervision of internal control in the enterprise daily activities for management rights suppresses managers'control hallucinations,which reduces the managers'overconfidence degree and affects the firm value.Based on the theoretical analysis,this paper assumes that:H₁ Managers'overcon-fidence has a negative correlation with firm value.H₂ The quality of internal control has a significant positive correlation with firm value.H₃ To ensure the efficiency and effec-tiveness of business activities can suppress the reduction of firm value due to managers'overconfidence.H₄ To ensure the reliability of financial reporting can suppress the re-duction of firm value due to managers'overconfidence.H₅ To ensure that enterprises comply with applicable laws and regulations can suppress the reduction of firm value due to managers'overconfidence.In order to verify the above analysis,in the empirical process,this paper used the relative salary ratio to measure the managers'overconfidence;the three aspects of target level of internal control measured the internal control quality;the Tobin Q value was used to measure the enterprise value.In the measurement of target level of the internal control,the efficiency and effectiveness of business activities effect was analyzed by six indicators of four aspects reflecting the enterprise's asset management ability,the cost,the cash generation ability from production and operation and the profitability.These indicators line of principal component analysis composite high and low scores of effi-ciency of enterprise operation effect.The reliability of financial reporting took corporate governance environment and financial reporting audit opinion two indicators into con-sideration on analytic hierarchy process to calculate the overall score to measure.En-terprise compliance was measured by whether the firm is legitimate or legitimate.The empirical analysis showed that Hypothesis 1,3,4 were validated,Hypothesis 2 was part validated,and Hypothesis 5 was not validated.Finally,this paper analyzed the empirical conclusion in detail,explained the reason of hypothesis which were not proved and elaborated the conclusion of this paper,and put forward some suggestions on how to suppress managers'overconfidence.Enter-prises should pay attention to the assessment and control about the behavior of manag-ers.Enterprises should be targeted to the psychological training of managers.Enterpris-es should improve the internal control activities.For those enterprises whose managers are overconfident should focus on ensuring the efficiency and effectiveness and the re-liability of financial reporting.