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All Is Not Lost that Is Delayed: Overconfidence and Investment Failure

36 Pages Posted: 6 Jan 2017 Last revised: 6 Jun 2017

André Betzer

BUW- Schumpeter School of Business and Economics

Inga van den Bongard

University of Mannheim - Finance Area

Erik Theissen

University of Mannheim - Finance Area

Christine Volkmann

University of Wuppertal

Date Written: January 4, 2017

Abstract

Using a unique panel data set of private German firms over the period 2002 to 2013 we analyze the relation between managerial overconfidence and investment policy in small and medium-sized firms. We construct direct estimates of managerial overconfidence that are based on sales forecasts. We find that overconfident managers are more likely to invest, and that this relation is driven by expansion investments (as opposed to replacement investments). Most importantly, we provide empirical evidence on the determinants of failed (downsized, delayed or abandoned) corporate investment projects. Controlling for socio-demographic variables and firm characteristics, we find that investment projects planned by overconfident managers are more likely to fail. When we differentiate between the three categories of failure (abandoning, delaying, and downsizing) we find that overconfident managers are more likely to delay, rather than to abandon or downsize, an investment project. We offer an explanation that is based on the theory of cognitive dissonance.

Keywords: overconfidence, small and medium-sized enterprises, corporate investment, private companies

JEL Classification: G31, G32, O16

Suggested Citation

Betzer, André and van den Bongard, Inga and Theissen, Erik and Volkmann, Christine, All Is Not Lost that Is Delayed: Overconfidence and Investment Failure (January 4, 2017). Available at SSRN: https://ssrn.com/abstract=2893548

André Betzer (Contact Author)

BUW- Schumpeter School of Business and Economics ( email )

Gaußstraße 20
Wuppertal
Germany

HOME PAGE: http://finance.uni-wuppertal.de/index.php?id=1153

Inga Van den Bongard

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Christine Volkmann

University of Wuppertal ( email )

Gaußstraße 20
42097 Wuppertal
Germany

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