Investigating the Effect of Managers' Overconfidence on Companies' Financing Working Procedures

Document Type : Research Paper

Authors

1 PhD in Financial Management, Ilam Branch, Islamic Azad University, Ilam, Iran.

2 Associate Professor of Management, Ilam Branch, Islamic Azad University, Ilam, Iran.

3 Assistant Professor of Accounting, Ilam University, Ilam, Iran.

10.22103/jdc.2020.15014.1086

Abstract

Objective: One of the most important decisions of corporate managers is how to finance economic enterprises, which play an important role in the continuation and growth of their profitability. Numerous factors can affect companies' financing decisions, including the personality traits of senior managers. The purpose of this article is to investigate the effect of excessive self-confidence of managers on companies' financing working procedures in Tehran Stock Exchange.
Method: The statistical population of this research is the companies listed in Tehran Stock Exchange and its statistical sample includes data of 139 companies during the seven-year period 2011-2017. The sampling method is systematic removal and the method used for estimating the model is multivariate regression method using estimation of combined data with fixed effects.
Findings: The results showed that there is an inverse and significant relationship between excessive self-confidence of managers and financing through internal resources of the company, so that increasing self-confidence of managers reduces financing through internal resources of the company, so that increasing self-confidence of managers reduces financing through internal resources of the company. There is also a significant and direct relationship between managers' overconfidence and financing out of company, so that high self-confidence leads the corporate managers toward extra-organizational financing, and thus the amount of out-of-company financed resources increases.
Conclusion: Overconfidence causes managers to fail to act rationally and misinterpret their accepted risk level. For this reason, overconfident managers may, contrary to expectations, be inclined to this type of financing despite the risk of out-of-company financing, and ultimately cause to increase the company's financial costs and reduce its profitability.

Keywords

References

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Journal of Development and Capital
Volume 5, Issue 1 - Serial Number 8
August 2020
Pages 205-226

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History

  • Receive Date: 27 November 2019
  • Revise Date: 27 February 2020
  • Accept Date: 22 April 2020

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