Managerial overconfidence, overinvestment, and R&amp;D spillover

Li, Chaofan; Zhou, Pin; Li, Yang

doi:10.1002/mde.3051

Cited by 16 publications

(17 citation statements)

References 19 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Motivations towards overinvestment originate from the misalignment of interests between managers and investors (Shi and Gao, 2018). Managers attempt to enlarge assets under their management to accumulate personal benefits, while investors pay attention to profit maximization to raise firm value in the future (Badavar Nahandi and Taghizadeh Khanqah, 2018; Li et al , 2019). As a result, managers expand investment level, increasing the probability of investing in projects with negative net present value (NPV) (Ding et al , 2019; Bhuiyan and Hooks, 2019).…”

Section: Introductionmentioning

confidence: 99%

Firm performance: the moderation impact of debt and dividend policies on overinvestment

Nguyen‐Trong

Nguyen

2020

JABES

View full text Add to dashboard Cite

PurposeDebt, dividend and investment policy constitutes a company's important financial decisions to determine firm performance. The research emphasizes on the problem of overinvestment, a phenomenon that worsens firm operation. Furthermore, it clarifies the moderation role of debt and dividend policy in mitigating the negative effect of overinvestment on firm performance in the case of Vietnamese listed companies.Design/methodology/approachThe research uses all financial statement of non-financial Vietnamese listed companies on Ho Chi Minh and Hanoi Stock Exchange in the period of 2008–2018. The data are collected from Thomson Reuters Eikon. The final data set is comprised of 669 listed companies. The study measures overinvestment though investment demand function and HP filter. Moreover, the research employs the dynamic model, so it has to apply the SGMM method to deal with the problem of endogeneity caused by the lagged dependent variable.FindingsThe research finds that overinvestment is negatively associated with firm performance. Debt or dividend policy separately can moderate the negative effect of overinvestment on firm performance. However, when these two policies are combined, they lessen the positive interaction impact of each policy due to the substitution between debt and dividend policy.Research limitations/implicationsThe research may have two limitations. Firstly, the research measures overinvestment indirectly through investment demand function and HP filter. These two measures only help identify the sign that companies may have the problem of overinvestment because we cannot determine whether they overinvest or not in reality. Secondly, when using interaction variables, the problem of multicollinearity may be higher, and this may adjust the signs and significance level of variables in the models.Practical implicationsPractically, the research proposes three policy recommendations. Firstly, a company can exploit debt or dividend policy to limit excessive free cash flow in order to constrain the problem of overinvestment. Secondly, a company should enhance its corporate governance to resolve agency problems. Thirdly, the government should make the financial sector more transparent and effective to improve monitoring functions of various parties in the capital market.Social implicationsOverinvestment sometimes can cause social issues. Overinvestment means that companies make ineffective investment. If they continue this situation over a long time, companies may have financial distress or even go bankruptcy. As a result, it will slow down economic growth and increase unemployment in the economy.Originality/valueThe research is supposed to make two great contributions to the existing empirical studies in two aspects. Firstly, it is the first attempt to take into consideration the interaction between overinvestment and financial policies. Secondly, it helps enhance the fundamental stance of the agency theory, which supports the interdependence of debt, dividend and investment policy.

show abstract

Section: Introductionmentioning

confidence: 99%

Firm performance: the moderation impact of debt and dividend policies on overinvestment

Nguyen‐Trong

Nguyen

2020

JABES

View full text Add to dashboard Cite

show abstract

“…To illustrate the definition of overconfidence, assume that the inverse market demand curve for a firm's product i is

p_{i} = a - q_{i} - b q_{j}

, where p i is product i 's price, a is the intercept or the true (or accurate) market size, q i is product i 's quantity, q j is the quantity produced by a rival company, and b is the degree of product differentiation or substitutability between the two products. Following the recent works of Englmaier (2010), Englmaier and Reisinger (2014), Yu (2014), and Li et al (2019) on managerial overconfidence, an overconfident manager of type α overestimates the market size and believes that α > a , and an unbiased manager is realistic or rational and believes that

α = a

. Therefore, in our specification, α ∈ [ a , ∞ ), and the level of overconfidence increases with α .…”

Section: Introductionmentioning

confidence: 90%

“…Our findings contribute to the literature that analyzes the welfare effects of managerial overconfidence in oligopolies. Inspired by previous studies, one could argue that if hiring an overconfident manager is optimal for a firm competing in output or price and the prices decrease, that welfare would improve (see, for example, Englmaier, 2010, 2011; Englmaier & Reisinger, 2014; Li et al 2019). Our analysis shows that this statement does not hold when R&D productivity is high.…”

Section: Introductionmentioning

confidence: 99%

Overconfidence and welfare in a differentiated duopoly

Tondji

2021

Manage Decis Econ

View full text Add to dashboard Cite

We examine whether owners' decisions to delegate corporate responsibilities to overconfident managers improve welfare. We develop a dynamic model with product differentiation, where firms compete in cost‐reducing research and development (R&D) and output. Before firms compete, each owner makes a strategic decision whether to hire an overconfident manager. The results reveal that when R&D technology is less productive, owners hire overconfident managers who overinvest in cost‐reducing R&D. These strategic decisions improve welfare when spillovers are small and R&D productivity is low, or spillovers are large, or product differentiation is strong.

show abstract

“…On the other hand, when the financing ability of the company is high, overconfidence compounds overinvestment. Li et al [40] analyzed the effects that investment spillover has on a company's investment level and selection of CEOs. The authors found a symmetric equilibrium for firms to appoint overconfident managers, which only benefits firms when the spillover effect is high.…”

Section: Prior Research On Investment Efficiencymentioning

confidence: 99%

The Influence of Corporate Environmental Responsibility on Overinvestment Behavior: Evidence from South Korea

Lee

Kim

2020

Sustainability

View full text Add to dashboard Cite

The purpose of this paper is to examine the association between corporate environmental responsibility (CER) activities and investment efficiency as measured by overinvestment, and whether the industry-level competition affects this association. We investigate a sample of 2285 non-financial firms with fiscal year-end in December listed in the Korea Stock Exchange Market for the period of 2013–2018, measuring the investment efficiency by overinvestment model. Using environmental scores from the Korea Corporate Governance Service to measure CER activities, we show that, on average, firms can decrease overinvestment behavior through CER activities in South Korea. Moreover, in firms in a highly competitive market, the negative association between CER activities and overinvestment is pronounced, indicating that strong product market competition are effective in monitoring managerial opportunistic behavior. These results are robust, even after controlling for different setting and alternative CER. These findings also suggest that the relationship between CER and overinvestment appears to be benefit firms that are sound and sustainable and honestly present their financial information.

show abstract

Managerial overconfidence, overinvestment, and R&D spillover

Cited by 16 publications

References 19 publications

Firm performance: the moderation impact of debt and dividend policies on overinvestment

Firm performance: the moderation impact of debt and dividend policies on overinvestment

Overconfidence and welfare in a differentiated duopoly

The Influence of Corporate Environmental Responsibility on Overinvestment Behavior: Evidence from South Korea

Contact Info

Product

Resources

About