A behavioural approach to corporate finance: A study of the Egyptian and UK markets

ElGebeily, Eman

Abstract

This thesis empirically investigates the effect of managerial overconfidence bias on investment decisions, stock price crash risk and default risk. Overconfidence is manifested in an exaggerated sense of being attentive only to one’s own information, believing that they are better than the average person, and an inflated belief in their ability to control events. Following recent theoretical work, I propose three models. My first model proposes that overconfident managers overinvest when they have abundant internal funds or riskless debt but restrict investment when forced to issue equity or take on risky debt to raise funds. In the second model, I expect managerial overconfidence increases bad news hoarding, leading to increased stock price crash risk. The third model predicts that overconfident managers engage in exaggerated risk-taking activities, increasing the risk of default. Empirical testing is applied on all listed firms in the Egyptian and the UK market. The overconfidence measures are insignificant for Egypt across all three models. For the UK, the following results are found. In the first model, investment of overconfident managers is significantly more responsive to cashflow, particularly in firms that are financially constrained. In the second model, I find that managerial overconfidence does lead to an increase in stock price crash risk. In the third model, I find that, contrary to the hypothesis, there is a significant negative relationship between managerial overconfidence and default risk. The results are then linked to existing empirical evidence and several conclusions are drawn, particularly in relation to manager overconfidence in developing countries.

Citation

ElGebeily, E. A behavioural approach to corporate finance: A study of the Egyptian and UK markets. (Thesis). University of the West of England. Retrieved from https://uwe-repository.worktribe.com/output/5715851

• Thesis Type: Thesis
• Deposit Date: Mar 23, 2020
• Publicly Available Date: Jul 30, 2020
• Public URL: https://uwe-repository.worktribe.com/output/5715851
• Award Date: Jul 30, 2020