Premium
Impacts of Internal Financing on Investment Decisions by Optimistic and Overconfident Managers
Author(s) -
Kamoto Shinsuke
Publication year - 2014
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2011.00624.x
Subject(s) - overconfidence effect , investment (military) , internal financing , optimism , value (mathematics) , investment decisions , business , finance , economics , behavioral economics , psychology , social psychology , machine learning , politics , political science , computer science , law , information asymmetry
The paper examines the interactions of investment decisions by managers who display optimistic and overconfident biases on the prospects of firm growth and riskiness with internal financing. The model demonstrates that the investment threshold for optimistic and overconfident managers can both rise above and fall below the threshold to maximize the market value of the firm, depending on the level of internal funds. It also derives the optimal level of internal funds that induces the managers to maximize the market value of the firm and illustrates the impacts of managerial optimism and overconfidence.