The Effects of Overconfident Manager and Mispricing
on Financing Choice
This study first examines whether corporate financing choice is influenced by overconfidence managers and market timing, and whether financing choice are influenced by market timing, investment opportunities, and overconfidence characteristics of managers. Furthermore, this study uses the differences between actual leverage ratio and target leverage ratio to examine how market timing, investment opportunities, and manager’s overconfidence characteristics to affect financing choices. After that, using future performance, we investigate whether return of assets of a firm will be affected by the financing choice. Finally, a robustness test verifies that the effects of overconfidence manager, market timing, and real investment on the financing choice when the firm is in the different life-cycle.
The empirical results show that when the interaction between overconfidence and mispricing, make the firm prefer to choice equity financing, while if the firm use both equity and debts financings, this effect does not significant. For the operating performance after financing, the interaction between overconfidence and mispricing has a positive impact on future returns of assets. However, when the firm choose equity financing because of the mispricing, would cause the subsequent loss of return. If the firm uses equity and debt financings, the interaction between overconfidence and mispricing would cause the negative impact on subsequent performance. For the firm with growth option, the interaction between overconfidence characteristics and mispricing has a positive impact on equity financings of a firm. After considering investment opportunities, the firm’s financing choice does not have significant prefer once, even has a negative association with equity financing. For subsequent operating performance, when the firm chooses equity financings, R&D expenditure induces the subsequent returns increase.
On the other hand, grouping the samples based on the difference between the target and actual leverage ratios, although the directions of findings are consistent with the above results, the influcence ability decrease. As for subsequent performance, both the interaction between overconfidence and market timing and the interaction overconfidence and growth option do not have significant association with subsequent performance. Using equity financings, both the interaction between mispricing and overconfidence and the interaction between R&D expenditure and overconfidence of managers have significant positively association with future performance of a firm. As for the firm’s life-cycle, when firm is at the growth stage, the interaction between mispricing and overconfidence has a positive impact on equity financing.
The documents also indicate that the capital constructure have a significant influence on relationship among financing choice and overconfidence, real investment, and market timing.