Managerial overconfidence and corporate policy decisions in UK Ccpanies

Managerial overconfidence, as a particular form of managerial irrationality,
concerns that some managers are less than completely rational and tend to
overestimate the outcome of the investment projects under their control. This
study focuses on the impact of managerial overconfidence on corporate policy
decisions. There are two main objectives. First, it explores the consequences of
managerial overconfidence for investment decisions and the cash holding policy
by emphasizing the role of financial constraints. Second, it investigates the
potential role of managerial overconfidence in determining debt maturity. Using
an original and very detailed dataset for a large sample of UK listed firms, we
show that investment by overconfident managers tend to be more sensitive to
internal funds in financially constrained firms identified by leverage, dividend,
age and cash. Meanwhile, a cash holding policy can be associated with
investment decision by overconfident managers. We argue that, though
investment can increase cash flow sensitivity of cash in financially constrained
fines identified by leverage and dividend, managerial overconfidence can reduce
this positive relationship. Moreover, managerial overconfidence can induce a
biased debt maturity structure. It seems that overconfident managers can take
advantage of short-term debt to signal their perceived firms' quality to the market.
Hence, firms with managerial overconfidence tend to increase the negative
relationship between long-term debt and firms' quality. Finally, we find that the
impact of managerial overconfidence on corporate decision can also vary with
different corporate governance mechanisms. We show that the impact of
managerial overconfidence on corporate policies in firms with weak corporate
governance mechanisms (i. e. lower ratio of non-executive directors in boards,
lower blockholders' ownership) is pronounced, whereas, in firms with good
corporate governance mechanisms, it turns to be insignificant.