CEO Hubris, Firm Investmemt and Firm Performance

Using the data of Chinese publically traded firms from 2002-2005, we examine the relationship between managerial overconfidence and firm expansion and find that managerial overconfidence is positively correlated with the rate of firm expansion. In particular, overconfident managers tend to internally expand firms in an aggressive manner. Also a negative, though not statistically significant, relationship exists between managerial overconfidence and M&A activity. Lastly, this paper examines the relationship between managerial overconfidence and firm performance and finds that managerial overconfidence decreases firm value due to overinvestment.