The Impact of Managerial Overconfidence on Business Management Behavior
and Corporate Financial Performance in China Market

Abstract

The modern market economy is a credit economy based on the rule of law, and one of its important components is the capital market. The development speed of China's capital market has amazed the world, and the achievements it has made are also remarkable, but in recent years it has exposed signs of rising pressure and increased risks. Statistics show that the performance of listed companies has been poor in the past two years, and some companies have suffered large goodwill impairment and serious losses. There are certainly many reasons for this phenomenon, but the law that external factors work through internal factors is unchanged. Therefore, it can be said that the various business decisions made by the internal management determine the survival of the company, so the management's own capabilities and behavioral characteristics and the specific content of the business decisions become crucial. This paper takes managerial overconfidence as a starting point to study how managers' psychological biases affect the company's financial difficulties through investment behavior.
Self-confidence is an optimistic attitude with positive practical significance. From a psychological perspective, confident people have a positive psychological suggestion that helps motivate people to push things in the expected direction, and subjective efforts often greatly increase the probability of success. According to the view of survival of the fittest, confident people are brave enough to innovate and dare to accept challenges, thereby increasing their chances of success, so they have more competitive advantages in survival. However, when confident people enjoy the joy of success, they are easily overwhelmed by victory and immersed in the sense of accomplishment brought by their confident, decisive and efficient decisions. The cognition of self-affirmation is constantly strengthened, and eventually an overconfident psychological bias is formed. With the in-depth development of behavioral finance, researchers believe that psychological factors will hinder decision makers from acting rationally, resulting in two behavioral obstacles that hinder the maximization of corporate value in practice. One exists within the company, which is the cost or value loss caused by the mistakes made by managers due to cognitive defects and emotional influences; the other exists outside the company, which is caused by the behavioral errors of analysts and investors. The behavioral obstacles within the company directly affect the formulation of business decisions and the consequences of decision execution, resulting in the transmission path of managers' overconfidence affecting investment decisions and investment decisions affecting financial difficulties.
This paper first reviews the existing literature in Chapter 2 from the perspectives of managerial overconfidence, financial distress, the impact of managerial overconfidence on investment behavior, and the impact of investment behavior on financial distress. It focuses on the measurement of managerial overconfidence and the impact of managerial overconfidence on financial decisions, especially investment decisions, and the empirical research on the causes of financial distress. In addition, in order to cooperate with the test of the hypothesis of the mediating effect research in the following text, it is necessary to sort out the existing literature related to this issue, so as to provide a basis for clarifying the applicability of the mediating effect analysis method to this study.
Chapter 3 studies the causes of financial distress of listed companies from the perspective of behavioral finance, focusing on the relationship between managerial overconfidence and corporate financial distress. The empirical test results show that overconfident companies are more likely to fall into financial distress than rational companies. Improvements in profitability, corporate governance, and operational capabilities can help alleviate financial distress, while investment opportunities and management holdings can worsen financial health. For the measurement indicators of managerial overconfidence, the article uses empirical analysis in the robustness test section to exclude other potential explanations for management's increased stock holdings, including insider information, historical performance, risk preferences, and signal transmission, proving that the method is robust.
Chapter 4 studies the mechanism between manager overconfidence and financial distress from the perspective of investment scale, which is specifically divided into two issues: over-investment and investment-cash flow sensitivity. Empirical test results show that: first, when a company is in a relatively loose internal and external financing environment, compared with a rational company, managers who are overconfident are more likely to overinvest; but in an environment with relatively harsh financing conditions, although they obtain The cost of capital is high, but managers are confident that the future high returns of investment projects will be enough to make up for the financing costs, and their own ability to control risks can ensure the realization of high returns. Therefore, the investment level has not been reduced accordingly, and there has been no significant underinvestment. . Second, in companies where managers are overconfident, relative to internal performance. In the case of rising cash flow, when internal cash flow declines, the sensitivity of investment to cash flow will become weaker, that is, the decline in internal cash flow does not bring about a corresponding decrease in investment scale, and the investment scale will adjust downwardly in stickiness, resulting in investment - The phenomenon of cash flow sensitivity asymmetry is weakened but still exists in a financing constraint environment. Finally, the phenomenon of over-investment and investment regulations. The downward adjustment stickiness of the model, that is, the asymmetric phenomenon of investment-cash flow sensitivity, plays a partial mediating role in the process of financial distress caused by managers' overconfidence.
Chapter 5 selects the perspective of diversified operation and studies the impact of managers' overconfidence on financial distress from the perspective of investment direction. The empirical test results show that: first, compared with rational managers, overconfident managers are more likely to choose diversified operations, and the degree of diversified operations is deeper, which is reflected in the higher probability of overconfident managers choosing diversified operations, the greater possibility of new income sources appearing in the same year, the greater number of industries involved in operations, the smaller Herfindahl index, and the larger the entropy index, which generally shows the expansion desire of overconfident managers. Secondly, compared with single operations, diversified companies are more likely to fall into financial distress, which is manifested in the greater number of industries, the smaller the Herfindahl index, and the larger the entropy index, the higher the probability of the company falling into financial distress. To further confirm this conclusion, this paper distinguishes different periods before and after the implementation of the decision, and proves from the perspective of time series that listed companies are more likely to fall into financial distress after the implementation of the decision compared with the financial status before the implementation of the diversification decision. Thirdly, if the company is in a single operation state before entering the sample period, then compared with experienced diversified companies, such companies are more likely to fall into financial distress after the first implementation of the diversification decision. The learning ability to learn from repeated experiences is the reason why different diversification behaviors have different effects. Fourth, diversification decisions, especially the behavior of diversifying once by a single company, play a partial mediating role in the process of managers' overconfidence leading to financial distress. Fifth, overconfident managers fall into financial distress after implementing diversification decisions and the distress lasts for at least three years, while rational managers do not fall into financial distress after implementing diversification decisions.
Chapter 6 selects the perspective of M&A decision-making and studies the impact of managerial overconfidence on financial distress from the perspective of investment behavior. The empirical test results show that: first, compared with companies with rational managers, companies with overconfident managers are more likely to choose M&A activities, and are more likely to engage in continuous M&A and more frequent M&A activities. Second, companies with overconfident managers are more likely to choose unrelated M&A and cross-regional M&A, and are more likely to choose cash payment when M&A, and will pay a higher M&A premium. Further analysis found that overconfident managers often ignore the difficulty of integrating resources in unrelated M&A transactions and the differences in the natural environment, social environment, corporate culture and values associated with cross-regional M&A. When determining the payment method, they cannot fully consider the company's internal resources and the market environment in which they are located. When determining the transaction amount, they exaggerate the potential value of the target company, which inevitably leads to overpayment. Third, the M&A behavior of companies with overconfident managers is more likely to lead the company into financial distress. Finally, the partial mediating effect of M&A in the relationship between managerial overconfidence and financial distress is significant. Managerial overconfidence indirectly leads to the company's financial distress through inappropriate M&A behavior, which is specifically reflected in the mediating effect of unrelated M&A, the mediating effect of cross-regional M&A, the mediating effect of improper payment methods, and the mediating effect of excessive M&A premium. Among them, the mediating effect of improper payment methods is reflected in the fact that the company overestimates the benefits of resource integration after the M&A, and still chooses to pay in cash under the condition of financing constraints, which leads to the company's financial distress.