The Effect of Top Executive's Overconfidence on the Investment-Cash Flow Sensitivity

The amount of firm`s cash flow as a cheap finance source have an important effect on investment level. Changes in cash flow levels may change investment level of the firm. Investment-cash flow sensitivity depends on firm characteristics، market situations and also executives’ personality such as overconfidence. Managers with these characteristics (being optimistic and overconfident managers) invest free cash flows in projects that have negative net present value. This study investigates the effect of top executives’ overconfidence on investment-cash flow sensitivity. Research sample includes 103 firms listed in (TSE) during 2007 to 2011. In order to investigate the research hypothesizes logistic regression model has been applied. Results show that overconfident managers have higher investment-cash flow sensitivity than other managers.