Managerial Overconfidence in Initial Public Offering Decisions and Its Impact on Macrodynamics and Financial Stability: Analysis Through an Agent-Based Model

47 Pages Posted: 27 Jan 2020

See all articles by Adam Szyszka

Adam Szyszka

Warsaw School of Economics

Marcin Rzeszutek

University of Finance and Management - Faculty of Management and Finance

Stanislas Augier

University of Angers - Centre d'économie de l'Université de Paris Nord (CEPN)

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN); Agence Française de Développement (AFD); Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK)

Date Written: January 5, 2020

Abstract

This study aims to connect the two strands of literature, i.e. behavioral corporate finance and agent-based macroeconomics to assess the impact of managerial overconfidence both at the micro and at the macro level. More specifically, we build a macroeconomic Agent-Based Model (ABM) calibrated for the specific case of Poland to explore whether overconfidence of top corporate managers in the context of their Initial Public Offering (IPO) decisions is detrimental or not for the firms being managed in that way, for the financial market dynamics and the selected macroeconomic indicators in Poland. We modelled heterogeneous firms with different IPO decision criteria depending on degree of managerial overconfidence. Our model also included a banking sector and a stock market that interact with the real economy. We found that there is a contradiction between the micro and the macro impact of overconfidence. Overconfident firms showed better performances in terms of output than other firms. But they were also more exposed to stock market volatility which makes them more likely to default. Higher default rate of overoptimistic firms negatively impacted the banking sector and increases financial instability. In turn, financial instability harmed the economy as a whole. We also observed that an increase in the proportion of overconfident firms is associated with a decrease in aggregate output although overconfident firms showed better individual performances. Finally, we run policy shocks and show that the increased financial instability can be offset by strengthening regulation of the banking sector.

Keywords: overconfidence, behavioral corporate finance, agent-based model, initial public offering, IPO

JEL Classification: G02, E03, E17

Suggested Citation

Szyszka, Adam and Rzeszutek, Marcin and Augier, Stanislas and Godin, Antoine, Managerial Overconfidence in Initial Public Offering Decisions and Its Impact on Macrodynamics and Financial Stability: Analysis Through an Agent-Based Model (January 5, 2020). Available at SSRN: https://ssrn.com/abstract=3514177 or http://dx.doi.org/10.2139/ssrn.3514177

Adam Szyszka (Contact Author)

Warsaw School of Economics ( email )

Al. Niepodległości 164
Warszawa, 02-554
Poland

HOME PAGE: http://https://biogram.sgh.waw.pl/#/biogram/aszysz1

Marcin Rzeszutek

University of Finance and Management - Faculty of Management and Finance ( email )

55 Pawia Street
Warsaw, 01-030
Poland

Stanislas Augier

University of Angers - Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

Antoine Godin

Centre d'économie de l'Université de Paris Nord (CEPN) ( email )

UMR7115
Université Paris-Nord
Paris XIII
France

Agence Française de Développement (AFD) ( email )

5, rue Roland Barthes
Paris Cedex 12, 75598
France

Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK) ( email )

Hans-Böckler-Straße 39
40476 Düsseldorf
Germany

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