Overinvestment, inflation uncertainty, and managerial overconfidence: Firm level analysis of Chinese corporations

• We study overinvestment and managerial overconfidence for Chinese firms.
• We find lower inflation uncertainty increases over-investment.
• Managerial overconfidence exacerbates such effect.
• Over-investment in SOEs is mainly driven by managerial overconfidence.
• The effect of managerial overconfidence is mute in non-SOEs.

We study corporate investment by considering both external economic factor and managerial behavior, in particular the dynamic interaction between inflation uncertainty and managerial overconfidence by employing a sample of Chinese companies. The empirical findings demonstrate that lower inflation uncertainty increases over-investment, and managerial overconfidence exacerbates such effect. Further analysis shows that over-investment in state-owned enterprises (SOEs) is mainly driven by managerial overconfidence, and the negative association between inflation uncertainty and overinvestment is due to managerial overconfidence. The effect of managerial overconfidence is mute in non-state-owned enterprises (non-SOEs). In addition, we find asymmetric impact of inflation uncertainty on corporate over-investment during different economic cycles.