The Effect of Overconfidence Managers on the Company's Risk Policies

Subject Areas : Financial engineering

Mansoureh HajiHashemi Vernosefaderani ¹ , Mohammadreza Abdoli ²

1 - Department of Accounting, Faculty of Humanities, Shahrood Branch, Islamic Azad University, Shahrood,Iran
2 - Associate professor, Department of Accounting, Islamic Azad University, Shahrood Branch, Shahrood, Iran

Received: 2017-07-26 Accepted : 2017-10-07 Published : 2018-03-21

Keywords: Risk, Management, Modified overconfidence model, Psychological variables, behavioral bias,

Abstract :

In this research, we study the effects of overconfidence of managers (one of behavioral bias) and its impact on companies’ risk policy from operational, financial and market perspectives. Due to weakness of existing modeks in describing psychological variables influencing overconfidence, first a justified model of overconfidence has been presented. To estimate model's parameters, random effects statistical model has been used. In this regard, a total of 98 companies listed on the Tehran Stock Exchange have been studied. Years 1389 to 1394 (Hijri calendar) is the period of investigation. Since the t-test value of financial and business risk is greater than 1.965 and its significance level is also less than 0.5, linear correlation between the business and financial risk and overconfidence is approved. Also t-test value of market risk is lower than 1.965 and its significance level is higher than 0.5. So linear and significant relation between the market risk and manager overconfidence is rejected. As the final conclusion, results confirm significant relationships between overconfidence and financial risk management and also business risk management. In the meantime, a significant relationship between overconfidence and market risk has not been observed