Business strategy and profitability of internal transactions with emphasis on the manager's overconfidence effect

The purpose of this study is to investigate the impact of business strategy and profitability of the firm's internal transactions and also to investigate the moderating effect of managers' overconfidence on this relationship.

Bentley et al.'s (2013) combined scoring system has been used to determine the strategy of each firm. In this research, 74 of the firms listed on the Tehran Stock Exchange during the period 2014-2020 have been examined. To test the hypotheses, were used the test of comparing two independent societies (defensive firms and aggressive firms) and t-test (Wilcoxon rank-sum tests).

The main results of the study show that the profitability of internal transactions in offensive firms is higher than defensive firms, but in firms with overconfidence of managers, the profitability of internal transactions in defensive firms is higher than offensive firms. Additional tests show that the relationship between business strategy and the profitability of internal transactions is more pronounced in these cases: domestic sales, internal transactions by men (relative to women), firms that are not covered by Act 141 of the Commercial Code in Iran, and are under family control and have significant distortions in reporting and the high level of information asymmetry.

This study empirically shows that business strategy can affect the profitability of internal transactions and managers' overconfidence is an effective indicator in adjusting this relationship. Understanding the impact of business strategy on the profitability of internal transactions can help foreign investors cautiously allocate resources among firms with a distinct business strategy.

Contribution: 

This study provides interesting evidence of the impact of business strategy on the profitability of internal transactions as well as the moderating effect of managers' overconfidence as one of the behavioral biases on the relationship between business strategy and profitability of internal transactions. These cases have not been studied so far and the results of this study develop the theoretical literature in this regard.mThe findings can also be useful in understanding the characteristics of firms that seek profitability through internal transactions, and also useful for those seeking to reduce the benefits of internal transactions (e.g., legislators).