IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v11y2021i1p2158244021999156.html
   My bibliography  Save this article

Managerial Cognitive Bias, Business Transformation, and Firm Performance: Evidence From China

Author

Listed:
  • Delu Wang
  • Yadong Wang
  • Jingyuan Yang
  • Ziyang Huang
  • Rong Cui

Abstract

Business transformation has become an important way of sustainable development of enterprises. However, the transformation performance is not ideal. Using data from Chinese listed companies from 2001 to 2016, this article employs the Heckman selection model to explore the impact of managerial cognitive bias on transformation strategy and firm performance. The results demonstrate that managerial cognitive bias plays an important role in inducing business transformation. The higher the degree of managerial overconfidence and overoptimism, the more the enterprise will tend to implement business transformation. An important contribution of the article is that it reveals the significant difference between overconfidence and overoptimism: The more overconfident the managers are, the more likely they are to adopt both internal cultivation and mergers and acquisitions (M&A) to realize firm business transformation, whereas the more overoptimistic the managers are, the more likely they are to adopt M&A rather than internal cultivation to realize firm business transformation. Furthermore, business transformation conducted by overconfident managers helps improve firm financial performance and market value, while transformation conducted by overoptimistic managers helps reduce both.

Suggested Citation

  • Delu Wang & Yadong Wang & Jingyuan Yang & Ziyang Huang & Rong Cui, 2021. "Managerial Cognitive Bias, Business Transformation, and Firm Performance: Evidence From China," SAGE Open, , vol. 11(1), pages 21582440219, March.
    • Handle: RePEc:sae:sagope:v:11:y:2021:i:1:p:2158244021999156
    DOI: 10.1177/2158244021999156
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/2158244021999156
    Download Restriction: no
    File URL: https://libkey.io/10.1177/2158244021999156?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ferris, Stephen P. & Jayaraman, Narayanan & Sabherwal, Sanjiv, 2013. "CEO Overconfidence and International Merger and Acquisition Activity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(1), pages 137-164, February.
    2. Acker, Daniella & Duck, Nigel W., 2008. "Cross-cultural overconfidence and biased self-attribution," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(5), pages 1815-1824, October.
    3. Jeffrey M Wooldridge, 2010. "Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262731835, December.
    4. Tasoff, Joshua & Letzler, Robert, 2014. "Everyone believes in redemption: Nudges and overoptimism in costly task completion," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 107-122.
    5. Mahdi Salehi & Mahmoud Lari DashtBayaz & Samaneh Mohammadi Moghadam, 2018. "The relationship between management characteristics and firm innovation," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 67(7), pages 1113-1131, September.
    6. Keiningham, Timothy & Aksoy, Lerzan & Bruce, Helen L. & Cadet, Fabienne & Clennell, Natasha & Hodgkinson, Ian R. & Kearney, Treasa, 2020. "Customer experience driven business model innovation," Journal of Business Research, Elsevier, vol. 116(C), pages 431-440.
    7. S. Trevis Certo & John R. Busenbark & Hyun‐soo Woo & Matthew Semadeni, 2016. "Sample selection bias and Heckman models in strategic management research," Strategic Management Journal, Wiley Blackwell, vol. 37(13), pages 2639-2657, December.
    8. He, Ying & Chen, Cindy & Hu, Yue, 2019. "Managerial overconfidence, internal financing, and investment efficiency: Evidence from China," Research in International Business and Finance, Elsevier, vol. 47(C), pages 501-510.
    9. Ulrike Malmendier & Geoffrey Tate, 2015. "Behavioral CEOs: The Role of Managerial Overconfidence," Journal of Economic Perspectives, American Economic Association, vol. 29(4), pages 37-60, Fall.
    10. Hilary, Gilles & Hsu, Charles & Segal, Benjamin & Wang, Rencheng, 2016. "The bright side of managerial over-optimism," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 46-64.
    11. Herz, Holger & Schunk, Daniel & Zehnder, Christian, 2014. "How do judgmental overconfidence and overoptimism shape innovative activity?," Games and Economic Behavior, Elsevier, vol. 83(C), pages 1-23.
    12. John A. Doukas & Dimitris Petmezas, 2007. "Acquisitions, Overconfident Managers and Self‐attribution Bias," European Financial Management, European Financial Management Association, vol. 13(3), pages 531-577, June.
    13. Alberto Galasso & Timothy S. Simcoe, 2011. "CEO Overconfidence and Innovation," Management Science, INFORMS, vol. 57(8), pages 1469-1484, August.
    14. Lai, Yi-Hsun & Tai, Vivian W., 2019. "Managerial overconfidence and directors' and officers' liability insurance," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    15. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    16. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    17. Ailing Pan & Wenkai Liu & Xue Wang, 2019. "Managerial overconfidence, debt capacity and merger & acquisition premium," Nankai Business Review International, Emerald Group Publishing Limited, vol. 10(4), pages 570-590, December.
    18. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
    19. Wang, Delu & Ma, Gang & Song, Xuefeng & Liu, Yun, 2016. "Political connection and business transformation in family firms: Evidence from China," Journal of Family Business Strategy, Elsevier, vol. 7(2), pages 117-130.
    20. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    21. Paul Hribar & Holly Yang, 2016. "CEO Overconfidence and Management Forecasting," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 204-227, March.
    22. Hackbarth, Dirk, 2008. "Managerial Traits and Capital Structure Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(4), pages 843-881, December.
    23. Díaz-Fernández, M. Carmen & González- Rodríguez, M. Rosario & Simonetti, Biagio, 2020. "Top management team diversity and high performance: An integrative approach based on upper echelons and complexity theory," European Management Journal, Elsevier, vol. 38(1), pages 157-168.
    24. Forbes, Daniel P., 2005. "Are some entrepreneurs more overconfident than others?," Journal of Business Venturing, Elsevier, vol. 20(5), pages 623-640, September.
    25. Thomas Astebro & Scott A. Jeffrey & Gordon K. Adomdza, 2007. "Inventor Perseverance after Being Told to Quit : The Role of Cognitive Biases," Post-Print hal-00476770, HAL.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ulrike Malmendier & Vincenzo Pezone & Hui Zheng, 2023. "Managerial Duties and Managerial Biases," Management Science, INFORMS, vol. 69(6), pages 3174-3201, June.
    2. Helen X. H. Bao & Steven Haotong Li, 2016. "Overconfidence And Real Estate Research: A Survey Of The Literature," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(04), pages 1-24, September.
    3. Danso, Albert & Lartey, Theophilus & Amankwah-Amoah, Joseph & Adomako, Samuel & Lu, Qinye & Uddin, Moshfique, 2019. "Market sentiment and firm investment decision-making," International Review of Financial Analysis, Elsevier, vol. 66(C).
    4. Johannes Brunzel, 2021. "Overconfidence and narcissism among the upper echelons: a systematic literature review," Management Review Quarterly, Springer, vol. 71(3), pages 585-623, July.
    5. Killins, Robert & Ngo, Thanh & Wang, Hongxia, 2021. "Goodwill impairment and CEO overconfidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    6. Tobias Heizer & Laura R. Rettig, 2020. "Top management team optimism and its influence on firms' financing and investment decisions," Review of Financial Economics, John Wiley & Sons, vol. 38(4), pages 601-622, October.
    7. Chen, Sheng-Syan & Ho, Keng-Yu & Ho, Po-Hsin & Nie, Wei-Ying, 2022. "CEO overconfidence and bondholder wealth effects: Evidence from mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 77(C).
    8. Ali Ataullah & Andrew Vivian & Bin Xu, 2018. "Optimistic Disclosure Tone and Conservative Debt Policy," Abacus, Accounting Foundation, University of Sydney, vol. 54(4), pages 445-484, December.
    9. 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.
    10. Jieqi Guan & Brian M. Lam & Ching Chi Lam & Ming Liu, 2022. "CEO overconfidence and the level of short-selling activity," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 685-708, February.
    11. Chen, Sheng-Syan & Lin, Chih-Yen & Tsai, Yun-Ching, 2018. "New product strategies and firm performance: CEO optimism," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 37-53.
    12. Kaplan, Steven N. & Sørensen, Morten & Zakolyukina, Anastasia A., 2022. "What is CEO overconfidence? Evidence from executive assessments," Journal of Financial Economics, Elsevier, vol. 145(2), pages 409-425.
    13. Gurdgiev, Constantin & Ni, Qiuxin, 2023. "Board diversity: Moderating effects of CEO overconfidence on firm financing decisions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    14. Yungu Kang & David H. Zhu & Yan Anthea Zhang, 2021. "Being extraordinary: How CEOS' uncommon names explain strategic distinctiveness," Strategic Management Journal, Wiley Blackwell, vol. 42(2), pages 462-488, February.
    15. Caleb Rawson, 2022. "Manager perception and proprietary investment disclosure," Review of Accounting Studies, Springer, vol. 27(4), pages 1493-1525, December.
    16. Bukalska Elżbieta, 2019. "Testing trade-off theory and pecking order theory under managerial overconfidence," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 55(2), pages 99-117, June.
    17. Hao, Ying & Li, Junyi & Cui, Xuegang & Ni, Juan, 2023. "CEO experience, managerial overconfidence and investment efficiency: Evidence from a natural experiment in China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    18. Adnan Safi & Xianrong Yi & Salman Wahab & Yingying Chen & Hassan Hassan, 2021. "CEO overconfidence, firm-specific factors, and systemic risk: evidence from China," Risk Management, Palgrave Macmillan, vol. 23(1), pages 30-47, June.
    19. Lee, Jin-Ping & Lin, Edward M.H. & Lin, James Juichia & Zhao, Yang, 2020. "Bank systemic risk and CEO overconfidence," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    20. Tuck Siong Chung & Angie Low & Roland T. Rust, 2023. "Executive confidence and myopic marketing management," Journal of the Academy of Marketing Science, Springer, vol. 51(5), pages 1118-1142, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:sagope:v:11:y:2021:i:1:p:2158244021999156. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.