Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 12

Search results for: overconfidence

12 Dividend Policy, Overconfidence and Moral Hazard

Authors: Richard Fairchild, Abdullah Al-Ghazali, Yilmaz Guney

Abstract:

This study analyses the relationship between managerial overconfidence, dividends, and firm value by developing theoretical models that examine the condition under which managerial overconfident, dividends, and firm value may be positive or negative. Furthermore, the models incorporate moral hazard, in terms of managerial effort shirking, and the potential for the manager to choose negative NPV projects, due to private benefits. Our models demonstrate that overconfidence can lead to higher dividends (when the manager is overconfident about his current ability) or lower dividends (when the manager is overconfident about his future ability). The models also demonstrate that higher overconfidence may result in an increase or a decrease in firm value. Numerical examples are illustrated for both models which interestingly support the models’ propositions.

Keywords: behavioural corporate finance, dividend policy, overconfidence, moral hazard

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11 Moderators of the Relationship between Entrepreneurial Self-Efficacy and Expected Firm Growth

Authors: Laszlo Szerb, Zsofia Voros

Abstract:

In this article, we seek to answer why many attempts to empirically link entrepreneurial self-efficacy to growth expectations have failed. While doing so, we reconcile the literature on entrepreneurial self-efficacy and overconfidence. By analyzing GEM APS (Global Entrepreneurship Monitor Adult Population Survey) data, we show that early-stage entrepreneurs’ self-efficacy statements are systematically inflated. Our results also indicate that entrepreneurial overconfidence is fading and its form changes as business owners learn and gather experience. In addition, by using Ajzen’s Theory of Planned Behavior (2006) as a modeling framework, we illustrate that early stage business owners’ overconfidence results in overly high firm growth expectations. However, the changes in the form of overconfidence and the adjustments of expectations on market conditions as a venture ages alter the relationship between overconfidence and growth expectations across the business life-cycle stages. Overall, our study empirically links young entrepreneurs’ overconfidence to their growth expectations at the firm level. This link is important to establish as expected growth was linked to realized growth both on micro and macro levels. Moreover, we detected several moderators of this relationship providing a potential answer to why many studies failed to link entrepreneurial self-efficacy to growth expectations.

Keywords: self-efficacy, overconfidence, entrepreneurship, expected growth

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10 Managerial Overconfidence, Payout Policy, and Corporate Governance: Evidence from UK Companies

Authors: Abdullah AlGhazali, Richard Fairchild, Yilmaz Guney

Abstract:

We examine the effect of managerial overconfidence on UK firms’ payout policy for the period 2000 to 2012. The analysis incorporates, in addition to common firm-specific factors, a wide range of corporate governance factors and managerial characteristics that have been documented to affect the relationship between overconfidence and payout policy. Our results are robust to several estimation considerations. The findings show that the influence of overconfident CEOs on the amount of, and the propensity to pay, dividends is significant within the UK context. Specifically, we detect that there is a reduction in dividend payments in firms managed by overconfident managers compared to their non-overconfident counterparts. Moreover, we affirm that cash flows, firm size and profitability are positively correlated, while leverage, firm growth and investment are negatively correlated with the amount of and propensity to pay dividends. Interestingly, we demonstrate that firms with the potential for undervaluation reduce dividend payments. Some of the corporate governance factors are shown to motivate firms to pay more dividends while these factors seem to have no influence on the propensity to pay dividends. The results also show that in general higher overconfidence leads to more share repurchases but the lower total payout. Overall, managerial overconfidence should be considered as an important factor influencing payout policy in addition to other known factors.

Keywords: dividends, repurchases, UK firms, overconfidence, corporate governance, undervaluation

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9 Overconfidence and Self-Attribution Bias: The Difference among Economic Students at Different Stage of the Study and Non-Economic Students

Authors: Vera Jancurova

Abstract:

People are, in general, exposed to behavioral biases, however, the degree and impact are affected by experience, knowledge, and other characteristics. The purpose of this article is to study two of defined behavioral biases, the overconfidence and self-attribution bias, and its impact on economic and non-economic students at different stage of the study. The research method used for the purpose of this study is a controlled field study that contains questions on perception of own confidence and self-attribution and estimation of limits to analyse actual abilities. The results of the research show that economic students seem to be more overconfident than their non–economic colleagues, which seems to be caused by the fact the questionnaire was asking for predicting economic indexes and own knowledge and abilities in financial environment. Surprisingly, the most overconfidence was detected by the students at the beginning of their study (1st-semester students). However, the estimations of real numbers do not point out, that economic students have better results by the prediction itself. The study confirmed the presence of self-attribution bias at all of the respondents.

Keywords: behavioral finance, overconfidence, self-attribution, heuristics and biases

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8 Evaluating the Relationship between Overconfidence of Senior Managers and Abnormal Cash Fluctuations with Respect to Financial Flexibility in Companies Listed in Tehran Stock Exchange

Authors: Hadi Mousavi, Majid Davoudi Nasr

Abstract:

Executives can maximize profits by recognizing the factors that affect investment and using them to obtain the optimal level of investment. Inefficient markets have shortcomings that can impact the optimal level of investment, leading to the process of over-investment or under-investment. In the present study, the relationship between the overconfidence of senior managers and abnormal cash fluctuations with respect to financial flexibility in companies listed in the Tehran stock exchange from 2009 to 2013 were evaluated. In this study, the sample consists of 84 companies selected by a systematic elimination method and 420 year-companies in total. In this research, EVIEWS software was used to test the research hypotheses by linear regression and correlation coefficient and after designing and testing the research hypothesis. After designing and testing research hypotheses that have been used to each hypothesis, it was concluded that there was a significant relationship between the overconfidence of senior managers and abnormal cash fluctuations, and this relationship was not significant at any level of financial flexibility. Moreover, the findings of the research showed that there was a significant relationship between senior manager’s overconfidence and positive abnormal cash flow fluctuations in firms, and this relationship is significant only at the level of companies with high financial flexibility. Finally, the results indicate that there is no significant relationship between senior managers 'overconfidence and negative cash flow abnormalities, and the relationship between senior managers' overconfidence and negative cash flow fluctuations at the level of companies with high financial flexibility was confirmed.

Keywords: abnormal cash fluctuations, overconfidence of senior managers, financial flexibility, accounting

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7 The Presence of Investor Overconfidence in the South African Exchange Traded Fund Market

Authors: Damien Kunjal, Faeezah Peerbhai

Abstract:

Despite the increasing popularity of exchange-traded funds (ETFs), ETF investment choices may not always be rational. Excess trading volume, misevaluations of securities, and excess return volatility present in financial markets can be attributed to the influence of the overconfidence bias. Whilst previous research has explored the overconfidence bias in stock markets; this study focuses on trading in ETF markets. Therefore, the objective of this study is to investigate the presence of investor overconfidence in the South African ETF market. Using vector autoregressive models, the lead-lag relationship between market turnover and the market return is examined for the market of South African ETFs tracking domestic benchmarks and for the market of South African ETFs tracking international benchmarks over the period November 2000 till August 2019. Consistent with the overconfidence hypothesis, a positive relationship between current market turnover and lagged market return is found for both markets, even after controlling for market volatility and cross-sectional dispersion. This relationship holds for both market and individual ETF turnover suggesting that investors are overconfident when trading in South African ETFs tracking domestic benchmarks and South African ETFs tracking international benchmarks since trading activity depends on past market returns. Additionally, using the global recession as a structural break, this study finds that investor overconfidence is more pronounced after the global recession suggesting that investors perceive ETFs as risk-reducing assets due to their diversification benefits. Overall, the results of this study indicate that the overconfidence bias has a significant influence on ETF investment choices, therefore, suggesting that the South African ETF market is inefficient since investors’ decisions are based on their biases. As a result, the effect of investor overconfidence can account for the difference between the fair value of ETFs and its current market price. This finding has implications for policymakers whose responsibility is to promote the efficiency of the South African ETF market as well as ETF investors and traders who trade in the South African ETF market.

Keywords: exchange-traded fund, market return, market turnover, overconfidence, trading activity

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6 Trading Volume on the Tunisian Financial Market: An Approach Explaining the Hypothesis of Investors Overconfidence

Authors: Fatma Ismailia, Malek Saihi

Abstract:

This research provides an explanation of exchange incentives on the Tunis stock market from a behavioural point of view. The elucidation of the anomalies of excessive volume of transactions and that of excessive volatility cannot be done without the recourse to the psychological aspects of investors. The excessive confidence has been given the predominant role for the explanation of these phenomena. Indeed, when investors store increments, they become more confident about the precision of their private information and their exchange activities then become more aggressive on the subsequent periods. These overconfident investors carry out the intensive exchanges leading to an increase of securities volatility. The objective of this research is to identify whether the trading volume and the excessive volatility of securities observed on the Tunisian stock market come from the excessive exchange of overconfident investors. We use a sample of daily observations over the period January 1999 - October 2007 and we relied on various econometric tests including the VAR model. Our results provide evidence on the importance to consider the bias of overconfidence in the analysis of Tunis stock exchange specificities. The results reveal that the excess of confidence has a major impact on the trading volume while using daily temporal intervals.

Keywords: overconfidence, trading volume, efficiency, rationality, anomalies, behavioural finance, cognitive biases

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5 The Competitive Newsvendor Game with Overestimated Demand

Authors: Chengli Liu, C. K. M. Lee

Abstract:

The tradition competitive newsvendor game assumes decision makers are rational. However, there are behavioral biases when people make decisions, such as loss aversion, mental accounting and overconfidence. Overestimation of a subject’s own performance is one type of overconfidence. The objective of this research is to analyze the impact of the overestimated demand in the newsvendor competitive game with two players. This study builds a competitive newsvendor game model where newsvendors have private information of their demands, which is overestimated. At the same time, demands of each newsvendor forecasted by a third party institution are available. This research shows that the overestimation leads to demand steal effect, which reduces the competitor’s order quantity. However, the overall supply of the product increases due to overestimation. This study illustrates the boundary condition for the overestimated newsvendor to have the equilibrium order drop due to the demand steal effect from the other newsvendor. A newsvendor who has higher critical fractile will see its equilibrium order decrease with the drop of estimation level from the other newsvendor.

Keywords: bias, competing newsvendor, Nash equilibrium, overestimation

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4 The Study on the Relationship between Momentum Profits and Psychological Factors: Evidence from Taiwan

Authors: Chih-Hsiang Chang

Abstract:

This study provides insight into the effects of investor sentiment, excess optimism, overconfidence, the disposition effect, and herding formation on momentum profits. This study contributes to the field by providing a further examination of the relationship between psychological factors and momentum profits. The empirical results show that there is no evidence of significant momentum profits in Taiwan’s stock market. Additionally, investor sentiment in Taiwan’s stock market significantly influences its momentum profits.

Keywords: momentum profits, psychological factors, herding formation, investor sentiment

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3 Do Clawback Provisions Increase the Demand for Audit Service?

Authors: Yu-Chun Lin

Abstract:

This study examines whether the adoption of clawback provisions increases the demand for audit service. We use abnormal audit fees to proxy for the demand for audit service. Because firms’ voluntary adoption of the clawback provisions is endogenously determined, this study controls for this bias using the propensity-score matching technique. Based on 1,247 U.S. firms that voluntarily adopt clawback provisions during 2003-2013 and a matched sample, the empirical results show that clawback provisions adoption is associated with abnormal audit fees, especially by firms with higher likelihood of misstatements. When firm executives are overconfident, abnormal audit fees increase subsequent to clawback provisions adoption. Since regulators require listed firms to adopt recoupment policy after 2015 in U.S., the evidence about higher demand for audit service might provide political implications for mandatory clawback provisions.

Keywords: clawback provisions, audit service, audit fees, overconfidence

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2 Actual and Perceived Financial Sophistication and Wealth Accumulation: The Role of Education and Gender

Authors: Christina E. Bannier, Milena Neubert

Abstract:

This study examines the role of actual and perceived financial sophistication (i.e., financial literacy and confidence) for individuals’ wealth accumulation. Using survey data from the German SAVE initiative, we find strong gender- and education-related differences in the distribution of the two variables: Whereas financial literacy rises in formal education, confidence increases in education for men but decreases for women. As a consequence, highly-educated women become strongly underconfident, while men remain overconfident. We show that these differences influence wealth accumulation: The positive effect of financial literacy is stronger for women than for men and is increasing in women’s education but decreasing in men’s. For highly-educated men, however, overconfidence closes this gap by increasing wealth via stronger financial engagement. Interestingly, female underconfidence does not reduce current wealth levels though it weakens future-oriented financial engagement and may thus impair future wealth accumulation.

Keywords: financial literacy, financial sophistication, confidence, wealth, household finance, behavioral finance, gender, formal education

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1 Exploring Behavioural Biases among Indian Investors: A Qualitative Inquiry

Authors: Satish Kumar, Nisha Goyal

Abstract:

In the stock market, individual investors exhibit different kinds of behaviour. Traditional finance is built on the notion of 'homo economics', which states that humans always make perfectly rational choices to maximize their wealth and minimize risk. That is, traditional finance has concern for how investors should behave rather than how actual investors are behaving. Behavioural finance provides the explanation for this phenomenon. Although finance has been studied for thousands of years, behavioural finance is an emerging field that combines the behavioural or psychological aspects with conventional economic and financial theories to provide explanations on how emotions and cognitive factors influence investors’ behaviours. These emotions and cognitive factors are known as behavioural biases. Because of these biases, investors make irrational investment decisions. Besides, the emotional and cognitive factors, the social influence of media as well as friends, relatives and colleagues also affect investment decisions. Psychological factors influence individual investors’ investment decision making, but few studies have used qualitative methods to understand these factors. The aim of this study is to explore the behavioural factors or biases that affect individuals’ investment decision making. For the purpose of this exploratory study, an in-depth interview method was used because it provides much more exhaustive information and a relaxed atmosphere in which people feel more comfortable to provide information. Twenty investment advisors having a minimum 5 years’ experience in securities firms were interviewed. In this study, thematic content analysis was used to analyse interview transcripts. Thematic content analysis process involves analysis of transcripts, coding and identification of themes from data. Based on the analysis we categorized the statements of advisors into various themes. Past market returns and volatility; preference for safe returns; tendency to believe they are better than others; tendency to divide their money into different accounts/assets; tendency to hold on to loss-making assets; preference to invest in familiar securities; tendency to believe that past events were predictable; tendency to rely on the reference point; tendency to rely on other sources of information; tendency to have regret for making past decisions; tendency to have more sensitivity towards losses than gains; tendency to rely on own skills; tendency to buy rising stocks with the expectation that this rise will continue etc. are some of the major concerns showed by experts about investors. The findings of the study revealed 13 biases such as overconfidence bias, disposition effect, familiarity bias, framing effect, anchoring bias, availability bias, self-attribution bias, representativeness, mental accounting, hindsight bias, regret aversion, loss aversion and herding bias/media biases present in Indian investors. These biases have a negative connotation because they produce a distortion in the calculation of an outcome. These biases are classified under three categories such as cognitive errors, emotional biases and social interaction. The findings of this study may assist both financial service providers and researchers to understand the various psychological biases of individual investors in investment decision making. Additionally, individual investors will also be aware of the behavioural biases that will aid them to make sensible and efficient investment decisions.

Keywords: financial advisors, individual investors, investment decisions, psychological biases, qualitative thematic content analysis

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