Curbing Managerial Myopia: The Role of Managerial Overconfidence in Owner-Managed Firms and Professionally Managed Firms

61 Pages Posted: 4 Apr 2017 Last revised: 19 Jan 2018

See all articles by Jingoo Kang

Jingoo Kang

Nanyang Technological University (NTU) - Division of Strategy, Management & Organization

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Minwook Kang

Nanyang Technological University (NTU) - Division of Economics

Jungmin Kim

Faculty of Business, The Hong Kong Polytechnic University

Date Written: January 19, 2018

Abstract

We develop and test a model in which managerial overconfidence offsets the underinvestment problem arising from managerial myopia. Using a three-period investment model in which we capture managerial myopia by hyperbolic discounting, we show that both overconfident owner-managers and professional managers who have myopic preferences can enhance firm value (up to a point) by increasing investment. This value-enhancing role of overconfidence is more evident for professional managers than for owner-managers. The results from simulation and empirical analyses support the model’s predictions. Thus, while managers’ cognitive biases, when considered separately, negatively impact firm performance, they can be beneficial when considered jointly.

Keywords: Overconfidence, Myopia, Present Bias, Hyperbolic Discounting, Firm Value, Investment, Owner-Manager, Professional Manager

JEL Classification: D03, D21, G32, L20

Suggested Citation

Kang, Jingoo and Kang, Jun-Koo and Kang, Minwook and Kim, Jungmin, Curbing Managerial Myopia: The Role of Managerial Overconfidence in Owner-Managed Firms and Professionally Managed Firms (January 19, 2018). Available at SSRN: https://ssrn.com/abstract=2944998 or http://dx.doi.org/10.2139/ssrn.2944998

Jingoo Kang

Nanyang Technological University (NTU) - Division of Strategy, Management & Organization ( email )

Singapore, 639798
Singapore

Jun-Koo Kang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Minwook Kang

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Jungmin Kim

Faculty of Business, The Hong Kong Polytechnic University ( email )

M757 Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
852 2766 7061 (Phone)

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