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Managerial Cognitive Bias, Business Transformation, and Firm Performance: Evidence From China

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  • Delu Wang
  • Yadong Wang
  • Jingyuan Yang
  • Ziyang Huang
  • Rong Cui

Abstract

Business transformation has become an important way of sustainable development of enterprises. However, the transformation performance is not ideal. Using data from Chinese listed companies from 2001 to 2016, this article employs the Heckman selection model to explore the impact of managerial cognitive bias on transformation strategy and firm performance. The results demonstrate that managerial cognitive bias plays an important role in inducing business transformation. The higher the degree of managerial overconfidence and overoptimism, the more the enterprise will tend to implement business transformation. An important contribution of the article is that it reveals the significant difference between overconfidence and overoptimism: The more overconfident the managers are, the more likely they are to adopt both internal cultivation and mergers and acquisitions (M&A) to realize firm business transformation, whereas the more overoptimistic the managers are, the more likely they are to adopt M&A rather than internal cultivation to realize firm business transformation. Furthermore, business transformation conducted by overconfident managers helps improve firm financial performance and market value, while transformation conducted by overoptimistic managers helps reduce both.

Suggested Citation

  • Delu Wang & Yadong Wang & Jingyuan Yang & Ziyang Huang & Rong Cui, 2021. "Managerial Cognitive Bias, Business Transformation, and Firm Performance: Evidence From China," SAGE Open, , vol. 11(1), pages 21582440219, March.
    • Handle: RePEc:sae:sagope:v:11:y:2021:i:1:p:2158244021999156
    DOI: 10.1177/2158244021999156
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