The Effect of Managerial Overconfidence on Firm Value: Evidence from the Johannesburg Stock Exchange

Abstract

Managers of a company are responsible for enhancing shareholder wealth. However, decisions made by managers are not always rational, and such irrational decisions could have a direct impact on the value of a firm, and thus, the wealth of its shareholders. Therefore, the objective of this study is to investigate the effect of managerial overconfidence on the value of firms trading on the Johannesburg Stock Exchange. The results of this study indicate that managerial overconfidence exhibits an insignificant effect on a firm’s leverage and innovation levels. Interestingly, this study reports that managerial overconfidence exhibits a significant negative effect on firm value. This finding implies that investors should avoid investing in firms with overconfident managers because such investments could result in a reduction of their wealth. As such, it is important that regulators and policymakers introduce policies to mitigate overconfident and biased decision-making processes.

Keywords

• firm value
• innovation
• leverage
• managerial overconfidence