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Korean Journal of Financial Studies 2013;42(2):323-339.
Published online April 30, 2013.
The Effects of Managerial Optimism and Overconfidence on Overinvestment and Underinvestment
Hwa Sung Kim
경영자의 낙관 및 과신이 과대투자와 과소투자에 미치는 영향
This paper analyzes how managerial optimism, overconfidence, and a combination of the two affect firm investments. Unlike existing studies that do not consider overinvestment and underinvestment, and consider only the case of a rational manager, we compare the overinvestment and underinvestment of a rational manager to those of a biased manager. After defining managerial optimism and overconfidence, we consider a simple model that allows us to reach a number of results. First, irrespective of the level of debt, managerial optimism generates a higher probability of overinvestment and lower probability of underinvestment relative to the rational manager. This implies that managerial optimism exacerbates the conflicts between a manager and shareholders but attenuates the underinvestment problem. Second, managerial overconfidence provides a lower probability of overinvestment when the level of debt is high. Managerial confidence helps debt decrease the agency costs of free cash flow more effectively. Third, when the debt level is high, managerial overconfidence may aggravate the underinvestment problem. Fourth, when compared with rational managers, a combination of optimism and overconfidence generates a higher probability of overinvestment regardless of the level of debt, and a lower probability of underinvestment when the level of debt is not high.
Key Words: 경영자 과신,경영자 낙관,과대투자,과소투자,행태기업재무,Behavioral Corporate Finance,Managerial,Managerial Optimism,Overconfidence,Overinvestment,Underinvestment

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