The role of managers' overconfidence on the irrational investment

Listed companies' irrational investment behavior was widespread in China. Traditional theory explain this phenomenon in the assumption of “rational economic man”. With the development of behavioral finance theory, research indicates that over-confidence can lead to over-investment decisions. This paper used Richardson's residual model to measure over-investment and creatively used shares' rises when ROE fall as the measure of overconfidence. We introduced cross item to further study on free cash flow's effect. By analyzing data from 2010 to 2014, we conclude that: (1) Managers' overconfidence is positively related to the over-investment. (2) When add the cross terms, the degree of overconfidence impose on over-investment is strengthen; (3) Contrast to that in non-manufacture, in manufacture, managers' overconfidence are negatively related to excessive investment; (4) Before 2015, the influencing factors contains overconfidence, cash flow, leverage, size and other factors. However, the influencing factors contains only overconfidence in 2015, corporate factors is no longer significant.