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

Author

Listed:
  • Damien KUNJAL

    (University of KwaZulu-Natal, South Africa)

  • Jameson NYASHA
  • Author-Name: Amir GHISYAN
  • Author-Name: Prinushlee J.GOVENDER
  • Sameshen MURUGASEN
  • Priyen NAIDOO
  • Dhruva S. PATEL
  • Paul-Francois MUZINDUTSI

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.

Suggested Citation

  • 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.
    • Handle: RePEc:rom:merase:v:6:y:2021:i:1:p:1-14
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    More about this item

    Keywords

    firm value; innovation; leverage; managerial overconfidence;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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