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Are companies managed by overconfident CEO financially constraint? Investment–cash flow sensitivity approach

Author

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  • Elzbieta Bukalska

    (Maria Curie-Sklodowska University, Poland)

Abstract

Research background: Overconfidence is one of the biases and fallacies that affect a cognitive process. Indeed, overconfidence has some serious consequences even in corporate finance. The literature is not consistent as for the impact of overconfidence on investment and financing decisions. Additionally, we include the issue of financial constraints to our analysis as investment-cash flow sensitivity (ICFS) is perceived as the measure of financial constraints. Purpose of the article: The aim of this paper is to test investment-cash flow sensitivity and financial constraints under managerial overconfidence. We think that companies managed by overconfident managers show a higher relation between cash flows and investment and demonstrate bigger financial constraints. Methods: In this paper, we test investment-cash flow sensitivity and financial constraints under CEO overconfidence among panel data of Polish private firms. We collect the unique sample of 145 non-listed companies by surveying the CEOs on their overconfidence. We collect the financial data of surveyed companies covering the 2010–2016 period. Total number of observations is 1015. Findings & Value added: First, we find a positive and higher relation between the investment-cash flow sensitivity for companies managed by overconfident managers which is in line with recent research. As for the financial constraints we find lower level of financial constraints among the companies managed by overconfident man-agers. This might be evidence that despite having lower financial constraints the companies managed by overconfident managers intentionally choose internal funds as the main source of financing and refrain from using external funds. To the best of our knowledge, this paper is the first empirical study for Polish companies on the relation between CEO overconfidence and financial decisions.

Suggested Citation

  • Elzbieta Bukalska, 2020. "Are companies managed by overconfident CEO financially constraint? Investment–cash flow sensitivity approach," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 15(1), pages 107-131, March.
    • Handle: RePEc:pes:ierequ:v:15:y:2020:i:1:p:107-131
    DOI: 10.24136/eq.2020.006
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    Citations

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    Cited by:

    1. Chao Li & Mian Wu & Wenli Huang, 2023. "Environmental, Social, and Governance Performance and Enterprise Dynamic Financial Behavior: Evidence from Panel Vector Autoregression," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 59(2), pages 281-295, January.
    2. Yi, Er, 2023. "Corporate governance, information disclosure and investment - Cash flow sensitivity," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Hardeep Singh Mundi, 2023. "Impact of CEO Overconfidence on Capital Structure Decisions: Evidence from S&P BSE 200," Vision, , vol. 27(1), pages 63-78, February.
    4. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.
    5. Qiubin Huang & Mengyuan Xiong & Ming Xiao, 2022. "Does managerial ability affect corporate financial constraints? Evidence from China," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 35(1), pages 3731-3753, December.
    6. Maryna Brychko & Tetyana Vasilyeva & Zuzana Rowland & Serhiy Lyeonov, 2021. "Does the real estate market behavior predict the trust crisis in the financial sector? The case of the ECB and the Euro," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 16(4), pages 711-740, December.

    More about this item

    Keywords

    CEO overconfidence; investment-cash flow sensitivity; financial constraints;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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