Industrial Policy,Managerial Overconfidence And Corporate Overinvestment

The sustainable development of a country requires not only the role of the market in its allocation,but also the government’s macro-control.Industrial policy is an effective tool for realizing the combination of government and market forces.Industrial policies not only can reduce resource misallocation and compensate for market failures,but also are an important means of the country to achieve industrial catch-up,form a competitive advantage,and accomplish strategic goals.China has widely implemented industrial policies.Strategically speaking,they are generally successful,and some industries saw rapid development.However,overcapacity appears in some industries such as photovoltaic and wind power industry.Some enterprise bankrupt because of excessive investment.Therefore,this paper aims to study the specific enterprise behavior under the support of industrial policy,and deeply explores the mechanism between industrial policy and enterprise behavior.First of all,this paper combs the domestic and foreign literature on industrial policy and managerial overconfidence.It is found that the existing literature studies the impact of industrial policy and managerial overconfidence on corporate investment as well as financing decision-making and discusses the specific impact mechanism,while few studies integrate the two perspectives.Based on the existing literature,this paper regards managerial overconfidence as the way how industrial policy influences the investment behavior of a enterprise,so as to establish the research path of “industrial policy→managerial overconfidence→over-investment”.Secondly,this paper selects the specific case of Kaidi Ecology and conducts in-depth analysis in combination with the theoretical framework.This paper analyzes how industrial policy affects the confidence of managers of Kaidi Eco from three aspects: industrial policy makes the bio-energy industry more profitable so that Kaidi Eco holds an optimistic attitudes;favorable policy makes investor and media pay more attention to this industry,and their praise to industry leaders and managers further enhance managerial overconfidence;government subsidies are expanding,and Kaidi Eco modifies the profit through government subsidies which delays the correction of overconfidence.Then it analyzes the influence of managerial overconfidence on the specific investment behavior from two aspects: the performance of over-investment;acquisition of non-performing assents as a result of overestimating the profitability of the investment target.Finally,the paper analysis the financial consequences of over-investment from profitability,solvency,and cash flow.This article draws the conclusion that industrial policy promotes the investment behavior of Kaidi Eco by enhancing managerial overconfidence,and the excessive investment of Kaidi Eco leads to its financial dilemma.The analysis in this article has enriched the research on industrial policy and managerial overconfidence,and drew enlightenment from specific case analysis,which warns managers to view industry opportunities in a correct way and respond rationally to the call of the country.