Empirical Evidence on the Relationship between Overconfidence and Overinvestment
This study specially investigates the behavioral biases of managers in decision making process. The main purpose of the research is to examinne the relationship between overconfidence and overinvestment as well as representation the impact of agency costs on this relationship. For this purpose, data collected from99 companies listed in Tehran Stock Exchange over the period 2003 - 2015. To test the hypotheses, the logit multivariate regression models based on panel data are used. Findings show that there is a significant and positive relationship between overconfidence and overinvestment. It means that optimistic managers have an over investment approach in decision making process. Also, agency costs have a significant impact on this relationship. Results indicate that the relationship between overconfidence and overinvestment is stronger in firms with high level of agency costs in comparison with low level ones. In fact, more conflict of interest between managers and investors caused more overinvestment because of more overconfidence.
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