Managerial hubris, firm expansion and firm performance: Evidence from China

Examining Chinese publicly traded firms from 2002 to 2005, we find managerial overconfidence to be positively correlated with the rate of firm expansion. In particular, overconfident managers tend to internally expand firms in an aggressive manner. We also find a negative, though not statistically significant, relationship between managerial overconfidence and M&A activity. Lastly, we examine the relationship between managerial overconfidence and firm performance, finding that managerial overconfidence decreases firm profitability due to overinvestment.

► We study the managerial overconfidence in Chinese listed firms during 2002–2005. ► Managerial overconfidence is positively correlated with the rate of firm expansion. ► Overconfident managers internally expand firms more aggressively. ► Overconfident managers decrease firm profitability due to overinvestment.