Over the last two and a half decades, the discipline of corporate finance has seen major changes. Managers are occasionally irrational, according to a large body of study in economics, finance, and even psychology. Managers have been observed to make subjective decisions that may not necessarily follow established corporate finance norms, owing to specific behavioural biases. Overconfidence or optimism is one such behavioural impact. There is a scarcity of study on the impact of managerial overconfidence on the general movement of a company's share price through corporate investments.
By looking at the share prices of 10 businesses from the JSE/FTSE top 40 index, the current study attempted to close this gap. Estimate management overconfidence, define the relationship between managing overconfidence and firm size, estimate the influence of managerial overconfidence on corporate investments, and determine the effect of managerial overconfidence on share price were the goals of this study. The findings reveal the presence of managerial overconfidence as measured by a firm's investment-cash flow sensitivity. The fixed effects panel regression demonstrates that Tobin's Q, a proxy indicator of a firm's investment-cash flow sensitivity, has an impact on the stock price. When all other explanatory variables are held constant, an increase in Tobin's Q leads the stock price to rise, implying that managerial overconfidence has an impact on the stock price. Furthermore, it has been discovered that managerial overconfidence rises with the size of the company. The small but positive association between the Q ratio and LnTA, as well as the Q ratio and sales, demonstrates this.Author(S) Details
Emmanuel Lawa
Durban University of Technology, South Africa.
Luther-King Junior Zogli
Durban University of Technology, South Africa.
Bongani Innocent Dlamini
Durban University of Technology, South Africa.
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