The effect of managers' overconfidence on dividend policy in the firms listed in Tehran stock market

Abstract

The characteristic of managers' personality is a key factor in their dividend policy. Overconfidence is an important feature of managers who are optimism about future earnings and cash flows and have a positive view of potential risk and return. Hence, we are going to investigate the effect of managers' overconfidence on dividend policy. We study 56 companies listed in Tehran Stock Exchange in the period of 2007 to 2012 to test the hypothesis. The results show that there is a significant and negative relation between managers' overconfidence and dividend policy; in other words they have lower dividend payout. We also demonstrate that an overconfident manager perceives the current operating cash flow as a stronger predictor of future operating cash flow so and increases the dividend payout. In addition regardless of whether the manager is rational or overconfident, a manager in a higher-growth firm pays a smaller dividend than a similar manager in a lower-growth firm.

Keywords

• cash flows
• Corporate Governance
• dividend policy
• growth opportunities
• Overconfidence