The Effect of Managerial Overconfidence on Firm Performance: A Panel Study of Indian Companies

Abstract

Behavioural Finance is a nascent field that examines the impact of human behaviour on financial decision making. Corporate behavioural finance is a niche that studies the actions of individuals especially CXO’s, management and board in the context of corporate financial decision making.  Overconfidence is an erroneous, dysfunctional and excessively optimistic assessment that individuals have of their own ability or knowledge. It is one of the most common but powerful and significant cognitive behavioural bias prevalent in managerial decision making. Research in various disciplines indicates that managerial overconfidence leads to detrimental consequences for firm performance such as destruction in value and subpar investment behaviours. In contrast literature also provides evidence of positive effect of managerial overconfidence due to its impact on innovation of pioneering products, processes and services. Past studies have investigated the effect of managerial overconfidence on firm performance outside India, but the literature for Indian Companies remains scarce. This research seeks to contribute to the broader understanding of how cognitive biases influence managerial behaviour and correlates with firm performance within the unique context of an emerging economy. By exploring managerial overconfidence within the Indian corporate landscape, this study aim to provide insights that may aid strategic decision-making and improve organizational performance.