Agency Cost, Top Executives’ Overconfidence, and Investment-Cash Flow Sensitivity - Evidence from Listed Companies in China

38 Pages Posted: 19 May 2012

See all articles by Wei Huang

Wei Huang

University of Hawaii at Manoa - Shidler College of Business

Zhibiao Liu

Nanjing University - School of Economics

Zhang Min

affiliation not provided to SSRN

Date Written: November 2, 2010

Abstract

We examine the effect of agency cost on the relation between top executives' overconfidence and investment-cash flow sensitivity using the data from Chinese listed companies. We find that on average top executives' overconfidence leads to increased investment-cash flow sensitivity. However, this relation holds only for companies with state-owned entities as controlling shareholders. In contrast, the relation is not significant for non-state controlled firms. We construct proxy for agency cost and find that state-controlled companies have significantly greater agency cost than non-state controlled companies. Results on sub-samples sorted by agency cost again show that the positive effect of top executives' overconfidence on investment-cash flow sensitivity holds only for companies that exhibit high agency cost. Our results therefore suggest that agency cost has a significant impact on the relation between top executives' overconfidence and investment-cash flow sensitivity, and the investment distortion due to top executives' overconfidence behavior may be alleviated by reducing agency cost through elevated supervision.

Keywords: CEO overconfidence, Agency cost, Investment-cash flow sensitivity, China

JEL Classification: G15, G34

Suggested Citation

Huang, Wei and Liu, Zhibiao and Min, Zhang, Agency Cost, Top Executives’ Overconfidence, and Investment-Cash Flow Sensitivity - Evidence from Listed Companies in China (November 2, 2010). Pacific-Basin Finance Journal, Vol. 19 (2011) 261-277. Available at SSRN: https://ssrn.com/abstract=2062595

Wei Huang (Contact Author)

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
808-956-7679 (Phone)
808-956-9887 (Fax)

Zhibiao Liu

Nanjing University - School of Economics ( email )

Nanjing, Jiangsu 210093
China

Zhang Min

affiliation not provided to SSRN ( email )

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