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Agency cost, top executives' overconfidence, and investment-cash flow sensitivity -- Evidence from listed companies in China

Listed author(s):
  • Huang, Wei
  • Jiang, Fuxiu
  • Liu, Zhibiao
  • Zhang, Min
Registered author(s):

    We examine the effect of agency cost on the relation between top executives' overconfidence and investment-cash flow sensitivity using the data from Chinese listed companies. We find that on average top executives' overconfidence leads to increased investment-cash flow sensitivity. However, this relation holds only for companies with state-owned entities as controlling shareholders. In contrast, the relation is not significant for non-state controlled firms. We construct proxy for agency cost and find that state-controlled companies have significantly greater agency cost than non-state controlled companies. Results on sub-samples sorted by agency cost again show that the positive effect of top executives' overconfidence on investment-cash flow sensitivity holds only for companies that exhibit high agency cost. Our results therefore suggest that agency cost has a significant impact on the relation between top executives' overconfidence and investment-cash flow sensitivity, and the investment distortion due to top executives' overconfidence behavior may be alleviated by reducing agency cost through elevated supervision.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927-538X(10)00078-8
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    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 19 (2011)
    Issue (Month): 3 (June)
    Pages: 261-277

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    Handle: RePEc:eee:pacfin:v:19:y:2011:i:3:p:261-277
    Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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