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Managerial Overconfidence, Self-Attribution Bias, and Downwardly Sticky Investment: Evidence from Korea

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  • Jeong-Ho Koo
  • Daecheon Yang

Abstract

The extant literature on behavioral corporate finance has explored the effects of overconfidence on investment–cash flow sensitivity (ICS) to explain overinvestment, yet it has overlooked the asymmetric behavior of investments in relation to changes in cash flow levels. This study examines whether investments behave asymmetrically responding to changes in cash flows and, if so, how managerial overconfidence affects asymmetric ICS. Using a sample of KOSPI and KOSDAQ firms in Korea, we find the incidence of downwardly sticky ICS in unconstrained firms. We then find that overconfident managers encourage ICS to be stickier than their rational peers do in unconstrained firms. Finally, we find that managerial overconfidence intensified by self-attribution bias induces ICS to get even stickier, suggesting more explicit evidence of corporate investment distortions. The results of alternative tests using the asymmetric models of Homburg and Nasev (2008) are qualitatively consistent with prior results. Overall, our findings imply a higher incidence of excessive investment commitments driven by overconfident managers.

Suggested Citation

  • Jeong-Ho Koo & Daecheon Yang, 2018. "Managerial Overconfidence, Self-Attribution Bias, and Downwardly Sticky Investment: Evidence from Korea," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(1), pages 144-161, January.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:1:p:144-161
    DOI: 10.1080/1540496X.2017.1398643
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    Cited by:

    1. Ana Belén Tulcanaza-Prieto & Iliana E. Aguilar-Rodríguez & Carlos Artieda, 2021. "Organizational Culture and Corporate Performance in the Ecuadorian Environment," Administrative Sciences, MDPI, vol. 11(4), pages 1-17, November.
    2. Damien KUNJAL & Jameson NYASHA & Author-Name: Amir GHISYAN & Author-Name: Prinushlee J.GOVENDER & Sameshen MURUGASEN & Priyen NAIDOO & Dhruva S. PATEL & Paul-Francois MUZINDUTSI, 2021. "The Effect of Managerial Overconfidence on Firm Value: Evidence from the Johannesburg Stock Exchange," Management and Economics Review, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 6(1), pages 1-14, June.
    3. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.
    4. Yang, Daecheon & Koo, Jeong-Ho & Kim, Jaemin, 2023. "The role of venture capitalist monitoring in mitigating cost stickiness: Evidence from Korea's IPO market," Finance Research Letters, Elsevier, vol. 52(C).
    5. Yang, Daecheon & Kim, Hyuntae, 2020. "Managerial overconfidence and manipulation of operating cash flow: Evidence from Korea✰," Finance Research Letters, Elsevier, vol. 32(C).

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