1 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY TRUONG DINH BAO LONG RESEARCH ON CEO’s OVERCONFIDENT BEHAVIOR AND FINANCIAL DECISIONS IN VIETNAM COMPANIES Major: Finance – Banking Major code: 93 40201 DOCTORAL THESIS SUMMARY HOCHIMINH CITY – 2018 The thesis is completed at: University of Economics Ho Chi Minh City Supervisor: Associate Professor Ph.D Nguyen Ngoc Dinh Contradicteur 1: …………………….…………………… Contradicteur 2: ……………………… …………………… Contradicteur 3: ……………………………………………… The thesis will be defensed in front of the Academic Council convened by: ………………………………………………………………………………… At: …… … /……/201… This thesis can be found at the library: ……………………………………………………………………………… SOCIAL REPUBLIC OF VIETNAM Independence – Freedom – Happiness Ho Chi Minh City, 5th Oct 2018 ABSTRACT OF THE THESIS Thesis title: Research on CEO’s overconfident behavior and financial decisions in Vietnam companies Major: Finance- Banking Code: 93 40201 PhD Student: Truong Dinh Bao Long Supervisor: Associate Professor PhD Nguyen Ngoc Dinh, Course: NCS2010 Keywords: Overconfidence, Financial Condition Index, Financial Decisions, Regression Model, CEO (Chief Executive Officer) CHAPTER INTRODUCTION TO THE APPROACH OF THE THESIS 1.1 The necessity of the Thesis Nowadays, in Vietnam, CEOs, who directly manage business activities, are often struggled to make good decisions Insufficient and inconsistent data, untransparent market, asymmetric information are the main causes leading to biased CEOs’ decisions This problem may become very serious and create agency cost for stockholders, it indirectly reduces the value of the company In other cases, companies can be distressed and bankrupted if such problems are not solved completely Although doing research on CEOs’ behaviors is very important in order to contribute to the theoretical and empirical framework in making right decisions, it is only implemented in the U.S market Therefore, it is necessary to implement and conduct a similar research in Vietnam market because the research can reveal a specific relationship between behavioral psychology and financial theories In types of behavior which may affect business decisions, overconfidence is the most featured and is measured almost accurately, so this point is fundamental to focus on this kind of behavior rather than others Most hypotheses, which are used in the thesis, are based on the U.S market; however, some of them are reasoned and transformed to reflect the core of the Vietnam market In addition, the hypothesis test stage is also used to accept or reject the hypotheses and make sure the robustness of the results In summary, the necessity of the thesis is to find out whether CEOs’ behavior affects financial decisions, whether it is a good or bad relationship, then what recommendations can be given for the business 1.2 A brief of the Literature Review The thesis is closely related to the literature about the relationship between overconfidence and corporate financial policies Malmendier and Tate (2005) prove that companies, which are managed by overconfident CEOs, has the higher sensitivity of internal cash flow than those being run by rational CEOs Malmendier and Tate (2008) suppose overconfident CEOs are likely to involve in takeovers, so the value of the companies is decreased Malmendier et al (2011) argue that when recognizing that the value of the company is underestimated, the CEO tends to avoid more external fundings Valeria Fedyk (2013) notes that CEO’s confidence causes two main impacts on the funding decisions The first impact is that overconfident tends to raise more debt and stocks to invest in potential projects They prefer using debt to using stock to raise fund; if CEOs estimate that the internal values of their stocks are higher than the market values of the stocks, reasonably they will sell new stocks to the market Moreover, Bouwman (2009) analyze the changes in the stock price and an increase of dividend in companies having optimistic CEOs In addition, the topic about the relationship between CEO’s overconfidence and financial decisions is quite new in Vietnam Recently, it received many concerns from domestic scholars For example, Nguyen Ngoc Dinh (2015) and Le Dat Chi (2015) find out some weak evidence about overconfidence can affect financial decisions However, the methodology of overconfidence measurement is still a challenge in Vietnam In this thesis, overconfidence measurement is improved significantly to those two previous papers to avoid the endogeneity 1.3 The aim of the Thesis Determining the existence of the relationship between overconfidence and investment decision in Vietnam Determining the existence of the relationship between overconfidence and investment decision in Vietnam under the effect of the financial conditions Determining the existence of the relationship between overconfidence and funding decision in Vietnam Determining the existence of the relationship between overconfidence and funding decision in Vietnam under the effect of a financial deficit Determining the existence of the relationship between overconfidence and dividend decision in Vietnam Determining the existence of the relationship between overconfidence and dividend decision in Vietnam under the effect of growth opportunity 1.4 The methodology of the Thesis The thesis uses regression models on the basis of the previous papers in the U.S market The variables and the way to collect data are similar to obtain the aim of the thesis Space dimension of the sample: Sample size includes 136 Vietnamese businesses full of the audited financial statement and publicly listed in Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange Time dimension of the sample: The data is collected from 2007 to 2016, in which four first years from 2007 to 2010 will be used to calculate net buying position to confirm the behavior of CEOs 1.5 A brief of the results in the Thesis Firstly, CEO overconfidence does not affect directly on the sensitivity of investmentcashflow Secondly, the financial condition plays an important role in reducing the sensitivity of investment-cashflow Thirdly, based on effective and efficient estimation models, the thesis finds out that CEO overconfidence increases the sensitivity of using debt under the effect of the financial deficit Fourthly, although there is no evidence to prove that CEO overconfidence affects the capital structure of the company, under the effect of financial conditions there is a weak evidence that overconfident CEOs reduce the financial leverage of the company Fifthly, overconfident CEOs pay more dividend than rational ones Finally, under the effect of growth opportunities, overconfident CEOs still pay more dividend than rational ones 1.6 The meaning of the Thesis The thesis partly contributes empirical evidence related to three financial decisions (investment, funding, dividend) This thesis also makes clear the relationship between CEO overconfidence and financial decisions in the Vietnam market Investors, managers, stockholders, and related parties can use the implication of the thesis to determine the sign of the business (Does the business face debt risk? Is the CEO overconfident? Is dividend too high?) 1.7 The structure of the Thesis In addition to the table of contents, abbreviation list, tables, annex and the Chapter here The thesis includes four remaining chapters as follows: Chapter Theoretical framework and literature review Chapter The methodology of the thesis Chapter The results of the thesis Chapter The conclusions and implications of the thesis CHAPTER THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1 Theories of Behavioral Finance about the Biased Recognition 2.1.1 Incomplete rational: Restrictive rational Some theoretical behavioral finance models show that subjects not adjust their belief in the right way when new information arrives It means the adjustment does not follow the Bayes rule Other models believe that subjects’ belief flows Bayes rules but their behavior is not appropriate with the expected subjective utility Therefore, these are the motivation of researchers to discover psychological recognition of the subjects From that, behavioral financial models (behavioral economics) are based on the irrational behavior of the subjects resulting from the biasness in the personal belief and interest The models are designed to explain how subjects can create their expectations 2.1.2 Cognitive psychology: Biased patterns in Behavior Heuristics or the rule of experiences is a thinking activity based on experienced events, it helps the subject make decisions easier Cognitive accounting is a type of behavior which helps the subject separate different decisions of the same resource This term is first expressed by Thaler (1985), when he tries to depict a process of human in which the economic results are standardized, classified and evaluated Later, Ritter (2003) contribute a descriptive process to make the model complete Another term given by Shefrin and Thaler, 1988 is framing Framing is a social scientific term including a set of definitions and description in which the subjects and organizations recognize and approach the reality The human tends to underestimate the long-run events and overestimate the most recent ones (Ritter, 2003) Almost all people have a strong, unrealistic and optimistic belief in their abilities (Weinstein, 1980) Especially, businessmen and senior managers tend to be overconfident Ritter (2003) gives the examples of low diversity which results from the familiarity of those Barber and Odean (2001) analyze the history of transactions and show that the more brokers trade, the worse their performance is 2.1.3 The overconfidence of managers in Behavioral Financial Theories Nowadays, although senior managers are educated and trained professional knowledge and leadership skills very well, they are irrational and make wrong decisions for many reasons Almost all of the reasons result from the impact of emotion on decisions Besides, even if a CEO is considered as perfect, he must also base on his sentiment to make decisions because of insufficient information Therefore, it is hard for a person to give a good conclusion on what they observe The reality is too different from the hypothesis of rational subjects This is the main cause explaining why a manager is irrational and biased in his decisions 2.2 Overconfidence and CEO Overconfidence According to De Bondt and Thaler (1995), “Findings that people have overconfidence in their instinct perhaps are the most consistent findings in the psychology of making decisions” Malmendier and Tate (2005) note that managers especially senior ones tend to be affected by misperception and overconfidence They always face complex and abstract situations although they are limited by their knowledge Therefore, they often commit themselves to achieve targets in a high level, so that makes them fall into the overconfidence 2.3 The approaches of CEO Overconfidence Measurement Malmendier and Tate (2005a, 2005b, 2008) suggest two approaches to measure the overconfidence of CEOs The first approach is based on revealed beliefs or the option and stock-based measure of CEO confidence The second approach is based on the way other people think of the CEO and is called the press-based measure of CEO confidence 2.3.1 Option and stock-based measure of CEO confidence In this measure, there are some different methods: Holder 67, Holder 150, Longholder and Net Buyer CEO holds their options at a level that excess their rational threshold of 67% or 150%, so those methods are Holder 67 and Holder 150, respectively CEO tries his or her best to hold the option years longer from the maturity point even though the value of options excesses their rational level So, the long holder measure is built on that basis On the other hand, Net Buyer measure is created to capture the tendency of buying more stocks of some CEOs although they know the sensitivity of business risk 2.3.2 Press-based measure of CEO confidence 10 This measure is based on the correlation between the number of articles about overconfidence/optimistic and unconfidence/ pessimistic According to Malmendier and Tate (2005b, 2008), we can distinguish who is the overconfident CEO based on the press Following each CEO on each year, they collect keywords such as a) Overconfident/ overconfidence, b) optimistic/ optimism, c) unconfident/ unconfidence, d) pessimistic/ pessimism, e) reliable, cautious, conservative, practical, frugal or steady They create a dummy index Totalconfident for each CEO by time as follows: 𝑡−1 𝑡−1 𝑇𝑂𝑇𝐴𝐿𝑐𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑡𝑖𝑡 = {1 𝑛ế𝑢 ∑ 𝑎𝑖𝑠 + 𝑏𝑖𝑠 > ∑ 𝑐𝑖𝑠 + 𝑑𝑖𝑠 + 𝑒𝑖𝑠 ; 𝑠=1 𝑠=1 𝑜𝑡ℎ𝑒𝑟𝑤𝑖𝑠𝑒 2.4 The theories of CEO overconfidence and corporate financial decisions On the aspect of investment, the theory is that CEO overconfidence impacts on investment decisions on three approaches: First, overconfidence leads CEOs to overinvestment Secondly, overconfidence increase the sensitivity of investmentcashflow Finally, overconfidence leads CEOs to optimal investment Heaton (2002) shows that optimistic CEOs believe that projects will have higher cash flow and tend to accept more projects Malmendier and Tate (2005a) regress the sensitivity of investment-cashflow to find out similar discoveries like Heaton (2002) Malmendier and Tate (2005b) show that overconfident CEO will overestimate the future rate of return; therefore, they will invest too much Goel and Thakor (2008) show that overconfident CEO, who are not risk-adverse, will invest more than the optimal investment level In terms of funding decision, Heaton (2002) and Hackbarth (2008) investigate biasness in funding decisions via optimism/overconfidence Those models give them clues that optimistic and overconfident CEOs will choose the higher financial leverage rate Hackbarth (2008) argues that overconfident CEOs believe the cash flow in their companies are less variated, then their companies have lower chances to get distressed despite that this is not true In terms of dividend policy, 14 variables as ownership rate on total common stock (Owp), growth opportunity (Tobin’Q) and cash flow of the company I in year t, CFit Descriptive statistics Variable Obs Mean Std Min Max Properties of CEO OC 816 0.2588 0.4386 Owp 816 0.0621 0.0971 0.0000 0.5501 Tenure 816 9.7471 4.1874 I 816 0.0527 0.0831 0.0000 0.9464 CF 816 0.0928 0.0876 -0.0656 0.4193 Debt 816 0.0018 0.0645 -0.2713 0.5603 Equity 816 0.0043 0.0281 -0.1609 0.2259 FD 816 0.0061 0.0696 -0.2713 0.5603 Profit 816 0.1204 0.0964 -0.1725 0.6505 Tang 816 0.2677 0.2101 0.0003 1.2095 ln(Sales) 816 13.2743 1.4036 8.9692 17.0552 Q 816 0.9560 0.3488 0.3785 3.3435 Lev_bk 816 0.3621 0.2548 0.0000 0.8725 Lev_mk 816 0.4337 0.3057 0.0000 0.9413 Return 816 -0.1998 0.5071 -1.7460 0.8629 -0.1203 0.5604 -1.0213 0.4788 34 Properties of company Financial conditional index FCI 816 15 CHAPTER THE RESULTS OF THE THESIS After regressing a sample data including 136 non-financial listed company which is collected from both HNX and HSX exchanges on the period from 2011-2016, the thesis has found some profound evidence Firstly, in Vietnam, CEO confidence does not impact on the sensitivity of investment and cashflow This evidence seems to be different from that of Manmeldier et al (2005, 2008, 2012) Secondly, the financial condition plays an important role in reducing the sensitivity of investment-cashflow Thirdly, based on effective and efficient estimation models, the thesis finds out that CEO overconfidence increases the sensitivity of using debt under the effect of financial deficit Fourthly, although there is no evidence to prove that CEO overconfidence affects the capital structure of the company, under the effect of financial conditions there is a weak evidence that overconfident CEOs reduce financial leverage of the company Fifthly, overconfident CEOs pay more dividend than rational ones Finally, under the effect of growth opportunities, overconfident CEOs still pay more dividend than rational ones Table 4.1 CEO overconfidence and the sensitivity of investment - cashflow Dependent variable: I(t) Independent variable: CF OC (1) (2) (3) (4) (5) (6) Pooled Pooled Pooled Pooled Pooled GMM- OLS OLS OLS OLS OLS CUE 0.2702 0.3436 0.3918 0.3750 1.1163 0.3051 (4.08)*** (2.53)** (2.24)** (1.99)** (0.65) (0.5) 0.0266 0.0230 0.0427 0.0062 (1.12) (0.74) (1.06) (0.49) 16 OC*CF -0.2087 -0.1731 -0.2927 0.0675 (-0.93) (-0.72) (-0.91) (0.33) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes CEO-level Control CEO-level Control*CF Firm-level Control Yes Firm-level Control*CF Year Fixed Efffects Yes Year Fixed Efffects*CF Firm Fixed Effects Intercept Obs R-squared Arellano-Bond test for test for AR(1) (p-value) Arellano-Bond AR(2) (p-value) Yes Yes Yes Yes Yes 0.0277 -0.0229 -0.0277 -0.0790 0.0034 -0.0526 (4.86)*** (1.7)* (1.6) (-0.34) (0.01) (-0.91) 816 816 816 816 816 544 0.081 0.4982 0.4999 0.5052 0.5155 0.2620 0.0806 0.0050 Sargan J test (p-value 0.0511 Hansen J test (p-value) 0.6434 All standard deviations (in the parenthesis) are adjusted errors to adapt to heteroskedasticity GMM-CUE is used because it is beneficial and effective to solve the cases in which heteroskedasticity and autocorrelation exist GMM-CUE use the first lag of Q and all interactive variables with CF and dummy variable as its instrument varibles ***, **, * are significance levels at 1%, 5% and 10%, respectively Hausman test is used to check whether FEM or REM is more suitable (H0: REM is better) 17 Table 4.2 CEO overconfidence and the sensitivity of investment – cashflow under the effect of investment - cashflow Dependent variable: I(t) Independent variable: I(t-1) CF OC OC*CF (1) (2) (3) (4) (5) (6) SGMM SGMM SGMM SGMM SGMM SGMM 0.2644 0.2871 0.2890 0.2800 0.2874 0.2919 (3.47)*** (4.18)*** (4.32)*** (4.01)*** (3.94)*** (4.17)*** 0.1692 0.1658 0.1668 0.1695 0.0324 (0.21) (0.19) (0.19) (0.18) (0.03) 0.0103 0.0114 0.0093 -0.0008 -0.0001 -0.0001 (0.93) (1.01) (0.87) (-0.05) (-0.01) (-0.01) -0.1072 -0.1318 -0.1306 0.0880 0.0829 0.0588 (-0.54) (-0.64) (-0.65) (0.37) (0.32) (0.24) -0.0196 FCI (-0.63) FCI*CF OC*FCI OC*FCI*CF 0.1275 0.1143 (0.51) (0.47) 0.0436 0.0382 0.0332 (1.21) (1.29) (0.93) -0.9127 -0.8893 -0.8577 (-2.8)*** (-2.69)*** (-2.74)*** CEO-level Control Yes Yes Yes Yes Yes Yes CEO-level Control*CF Yes Yes Yes Yes Yes Yes Firm-level Control Yes Yes Yes Yes Yes Yes Firm-level Control*CF Yes Yes Yes Yes Yes Yes 18 Year Fixed Efffects Yes Year Fixed Efffects*CF Yes Yes Yes Yes Firm Fixed Effects Yes Yes Yes -0.0255 -0.0258 -0.0242 (-0.39) (-0.37) (-0.35) 544 544 544 0.1500 0.1390 0.0361 Sargan J test (p-value) Hansen J test (p-value) Intercept Obs Arellano-Bond test for AR(1) (p-value) Arellano-Bond test for AR(2) (p-value) Yes Yes Yes Yes 544 544 544 0.1380 0.1470 0.1470 0.1450 0.0282 0.1098 0.0436 0.0337 0.0693 0.0704 0.0628 0.0479 0.0832 0.0059 0.2620 0.8590 0.6740 0.6010 0.8780 0.6320 0.3840 All standard deviations (in the parenthesis) are adjusted errors to adapt to heteroskedasticity GMM-IV is adjusted for the autocorrlation and error cases SGMM (System GMM) uses instrument variables including all controlling variables and dummy variables ***, **, * are significance levels at 1%, 5% and 10%, respectively Hausman test is used to check whether FEM or REM is more suitable (H0: REM is better) Table 4.3 CEO overconfidence and the capital structure Dependent variable: Lev_mk Independent variable: FD (1) (2) (3) (4) (5) (6) (7) (8) P-OLS REM REM FEM REM FEM GMM -IV GMM -IV 0.5623 0.2749 0.2654 0.2354 0.2118 0.2240 0.4425 0.4586 (5.55)*** (3.24)*** (3.22)*** (3.03)*** (2.19)** (2.28)** (2.72)*** (2.84)*** 19 Profit Tang ln(Sales) Q -0.7351 0.1417 0.1387 0.1099 0.1043 0.1081 -0.6323 -0.6213 (-3.98)*** (1.10) (1.44) (0.74) (0.67) (0.71) (-2.62)*** (-2.43)** 0.1190 -0.0260 -0.0247 -0.0122 -0.0236 -0.0315 0.2437 0.2544 (1.04) (-0.17) (-0.13) (-0.08) (-0.15) (-0.20) (2.45)** (2.19)** 0.0763 0.0443 0.0476 0.0380 0.0357 0.0370 0.0556 0.0556 (4.47)*** (0.89) (0.81) (0.79) (0.72) (0.74) (3.07)*** (2.79)*** -0.2018 -0.0334 -0.0369 0.0544 0.0303 0.0251 -0.1863 -0.1900 (-3.41)*** (-1.02) (-1.51) (0.41) (0.61) (0.51) (-3.14)*** (-3.01)*** 0.5864 0.5919 0.2539 0.3654 -0.0262 -0.0263 (5.65)*** (5.93)*** (1.18) (1.59) (-0.21) (-0.19) -0.0524 -0.0483 -0.0459 -0.0198 -0.0015 (-2.71)*** (-2.09)** (-2.00)** (-0.31) (-0.03) 0.6010 0.6036 0.9507 0.9800 (1.32) (1.31) (3.22)*** (3.02)*** -0.1236 -0.1227 -0.0129 -0.0129 (-5.81)*** (-5.76)*** (-3.19)*** (-2.9)*** -0.0149 -0.0282 0.0097 0.0109 (-0.6) (-1.07) (1.00) (1.07) OC Return Owp Tenure Tenure*OC FCI FCI*OC Intercept Firm Fixed Effects Year Fixed Effects 0.2852 -0.0351 (4.49)*** (-0.39) 0.0457 -0.3303 (1.49) (-1.84)* -0.3393 -0.4994 -0.3697 -0.4658 0.7594 1.0353 -0.1133 -0.0954 (-1.4) (-0.77) (-0.78) (-0.74) (0.91) (1.17) (-0.47) (-0.36) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 20 Obs R-squared Hausman test 816 816 816 816 816 816 544 544 0.2668 0.8771 0.8771 0.8831 0.8880 0.8888 0.7718 0.7716 0.1394 0.2549 0.033 0.1671 0.0431 0.2138 0.1099 0.0355 0.0681 0.3412 0.2246 0.1908 0.3270 ArellanoBond for test AR(1) (p-value) ArellanoBond for test AR(2) (p-value) Sargan J test (p-value) Hansen test J (p- value) All standard deviations (in the parenthesis) are adjusted errors to adapt to heteroskedasticity GMM-IV is adjusted for the autocorrlation and error cases GMM-IV uses instrument variables including two differntial values of Retur and dummy variables ***, **, * are significance levels at 1%, 5% and 10%, respectively Hausman test is used to check whether FEM or REM is more suitable (H0: REM is better) 21 Table 4.4 CEO overconfidence and funding decision under the effect of financial deficit Dependent variable: Debt(t) Independent variable: FD (1) (2) (3) (4) (5) (6) P-OLS REM FEM REM FEM GMM-CUE 0.8484 0.8454 0.8350 0.8091 0.3275 0.7362 (14.63)*** (11.96)*** (10.09)*** (9.29)*** (1.75)* (5.04)*** -0.0345 -0.0354 -0.0115 -0.0032 (-2.67)*** (-3.03)*** (-0.96) (-1.18) 0.0385 0.0872 0.3478 0.2644 (0.24) (0.61) (2.40)** (2.02)** Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes OC OC*FD CEO-level Control CEO-level Control*FD Firm-level Control Yes Firm-level Control*FD Year Fixed Efffects Yes Year Fixed Efffects*FD Firm Fixed Effects Intercept Obs R-squared Yes Yes Yes Yes Yes -0.0034 0.0236 0.0233 0.0185 0.0106 -0.0006 (-2.72)*** (10.42)*** (8.77)*** (2.2)** (1.14) (-0.31) 816 816 816 816 816 255 0.8377 0.8786 0.8789 0.8877 0.9217 0.9339 5395.1 5612.8 5507.3 5441.9 3.39*** 3.01*** 2.06** 3.27*** 0.1137 0.0409 0.0778 0.0131 Log likelihood χ2 Hausman test 0.0103 22 Arellano-Bond test for test for 0.2345 AR(1) (p-value) Arellano-Bond 0.6395 AR(2) (p-value) Sargan J test (p-value) 0.4066 Hansen J test (p-value) 0.6197 All standard deviations (in the parenthesis) are adjusted errors to adapt to heteroskedasticity GMM-CUE is used because it is beneficial and effective to solve the cases in which heteroskedasticity and autocorrelation exist GMM-CUE use the first differential value of FD and all interactive variables with FD as its instrument varibles ***, **, * are significance levels at 1%, 5% and 10%, respectively Hausman test is used to check whether FEM or REM is more suitable (H0: REM is better) Table 4.5 CEO overconfidence and dividend decision Dependent variable: Div Independent variable: Owp OC Q CF ln(Sales) (1) (2) (3) (4) (5) (6) (7) FEM FEM REM FEM FEM FEM GMM - IV 122.6069 117.5162 131.0627 78.4912 122.2074 127.2179 -18.3563 (0.89) (0.86) (0.85) (0.57) (0.89) (0.92) (-0.72) 3.4715 3.0757 3.5166 3.1923 3.5245 3.6316 61.2179 (2.12)** (2.30)** (1.99)** (2.24)** (2.12)** (2.18)** (2.11)** 13.3328 15.0564 18.8671 1.4322 13.2850 13.9865 53.5833 (1.02) (1.15) (1.16) (0.10) (1.01) (1.06) (1.60) 0.4829 1.0373 0.7372 0.4854 0.3267 0.4686 1.8409 (0.21) (0.29) (0.36) (0.14) (0.09) (0.13) (0.41) -0.3780 -0.3813 -0.5769 -0.4535 -0.3768 -0.3878 0.3442 (-0.70) (-0.71) (-0.81) (-1.61) (-0.70) (-0.72) (0.20) 23 0.5531 Tenure (1.82)* 0.6568 Lev_bk (0.55) -2.50e-14 Tang (-0.03) 0.2972 OC*Q (2.33)** 2.7280 OC*CF (0.18) -5.58e-13 OC*Tang (-0.41) Intercept Year Fixed Efffects Firm Fixed Effects Obs Log likelihood χ2 Hausman test -14.0467 -17.5667 -20.0043 -1.1711 -13.9973 -14.7461 -73.7374 (-1.03) (-1.28) (-1.18) (-0.08) (-1.02) (-1.07) (-1.73)* Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 816 816 816 816 816 816 544 5180.49 4512.71 2511.24 4513.62 4476.41 4529.13 527.49*** 283.21*** 572.45*** 422.22*** 553.42*** 387.62*** 0.0316 0.0051 0.1738 0.0019 0.0012 0.0372 ArellanoBond test for AR(1) value) (p- 0.1513 24 ArellanoBond test for AR(2) (p- 0.0967 value) Sargan J test (p-value) Hansen J test (p-value) 0.3671 0.897 All standard deviations (in the parenthesis) are adjusted errors to adapt to heteroskedasticity GMM-IV uses instrument variables including two differntial values of Return and dummy variable ***, **, * are significance levels at 1%, 5% and 10%, respectively Hausman test is used to check whether FEM or REM is more suitable (H0: REM is better) CHAPTER THE CONCLUSIONS AND IMPLICATIONS OF THE THESIS 5.1 Main conclusions Hypothesis 1: In companies which have overconfident CEOs, the sensitivity of investment-cashflow is higher than in companies which have rational CEOs Although on the whole investment is affected by cash-flow, in both dynamic and static models, there is no evidence of the relationship between CEO overconfidence and the sensitivity of investment-cashflow The interactive coefficient of CEO overconfidence and cashflow has no statistical significance Hypothesis 2: The sensitivity of investment-cashflow in companies which have overconfident CEOs is affected by the effect of the funding deficit CEO overconfidence affects the sensitivity of investment-cashflow under the effect of macro-financial conditions The thesis shows that CEO overconfidence has an indirect role in that relationship Particularly, the impact has the negative sign and there are levels in the range of 0.86 to 0.91 That means CEO overconfidence reduces the effect of (good) financial conditions on the sensitivity This implies that 25 overconfident CEOs overestimate the internal cashflow Then, CEOs think positively about the potential projects if the financial conditions are good They invest more in those projects and not care much for the internal cashflow The thesis supposes that CEO are joining in the debt market where the hypothesis supports for the hypothesis Moreover, under the effect of financial deficit and good financial conditions, it is understandable that the sensitivity of investment-cashflow can be reduced To understand deeply this case, we should consider the relationship between CEO overconfidence and funding decision under the financial deficit Hypothesis 3: Overconfident CEOs use more debt than rational CEOs to reduce funding deficit One more, similar to hypothesis 1, the thesis has no evidence for the hypothesis on the sample of 136 Vietnamese companies with various models It is easy to see that when the financial market becomes better after the financial crisis 2017-2018, overconfident CEOs tend to reduce debt to support for their projects However, it is interesting that CEO overconfidence reduces the effect of financial conditions on market leverage (lev_mk) despite that it is weak evidence In addition, the coefficient of FCI has no statistical significance because of the interactive coefficient of FCI.OC Surprisingly, compared to rational CEOs, overconfident CEOs tends to reduce financial leverage rate when the financial conditions are better and vice versa Hypothesis 4: Overconfident CEOs use higher financial leverage than rational ones when funding the financial deficit from external sources The thesis has findings supporting this hypothesis The estimation result is closely related to the results in the hypothesis later on in which CEO overconfidence impacts on funding decisions under the financial deficit GMM models are used to improve the robustness in the argument Particularly, the result of Hansen J test cannot reject the feasibility of instrument variables while that of Arellano-Bond cannot reject the absence of the autocorrelation (I) and (II) in the model 26 Therefore, the final conclusion for the relationship between CEO overconfidence and funding decisions under the effect of financial deficit still remains Overconfident CEO tends to use more debt than rational CEOs In other words, when financial deficit exists, overconfident CEO tends to use more debt than rational CEOs Hypothesis 5: In companies which have overconfident CEOs, the dividend is less than in companies which have rational CEOs However, in Vietnam, the result is contrasted where overconfident CEOs pay times as much as the dividend that rational CEOs Although this result is different from that in the previous research, it is tested in many models to increase the robustness level Hypothesis 6: Rational CEOs pay more dividend than overconfident CEO under the effect of growth opportunities The difference between dividend payment by rational CEO and confident CEO is small in companies which have the high growth opportunity – the result is in column of table 4.5 This empirical evidence is similar to that in a paper of Sanjay Deshmukh et al (2013) for American and English markets 5.2 The limits of the Thesis Firstly, the database is short because 3-4 initial years are used for taking the differential Secondly, there is no alternative measure to compared with Net Buyer, then Net Buyer measure is not subjective Thirdly, the thesis cannot explain more the reasons why overconfident CEOs in Vietnam behave differently compared to overconfident western CEOs Fourthly, the recovery from the financial crisis, which is uncontrollable, in the research period can affect the result of the thesis Finally, Net Buyer measure is not an optimal method then it is likely to be incorrect 5.3 The implication and recommendation of the Thesis 5.3.1 Implication In terms of economic efficiency, the issues and conclusions in this thesis contribute to show directions in business management Leaders and stockholders can set out 27 similar questions related to six hypotheses in the thesis In terms of academic knowledge, this research expands the existing knowledge in corporate finance and behavioral finance This thesis shows the features of irrational CEOs who make biased decisions From that, the results of the thesis also contribute to the empirical literature review in explaining financial decisions This thesis is fundamental for other research in the same topics in Vietnam This is a valuable document for students who like to research 5.3.2 Recommendation The companies especially joint-stock companies should frequently evaluate whether their CEOs are overconfident If so, CEOs tend to make biased decisions such as using internal cash flow to pay the dividend instead of to invest in the projects In addition, overconfident CEOs use more debt than rational CEOs This leads companies to financial distress Therefore, training senior managers are the top-tier target in Vietnamese companies 28 LIST OF THE SCIENTIFIC ARTICLES OF THE AUTHOR PUBLISHED UEH - level research: Nguyen Ngoc Dinh, Le Dat Chi & Truong Dinh Bao Long, 2015 CEO Overconfidence Affects Investment Decisions – Case Study of Companies in Vietnam – Scientific research themes, Code CS-2014-18 (Project Manager: Associate Professor Ph.D Nguyen Ngoc Dinh) Nguyen Ngoc Dinh, Le Dat Chi & Truong Dinh Bao Long, 2016 CEO Overconfidence Affects Capital Structure – Case Study of Companies in Vietnam – Scientific research themes, Code CS-2015-32 (Project Manager: Associate Professor Ph.D Nguyen Ngoc Dinh) Hội thảo quốc tế: Long Truong Dinh Bao, Chi Le Dat, Vuong Chu Nhat Minh, “How Do Macrofinancial Conditions Impact On The Relation Between Overconfidence And Firm Investment? Evidence From Vietnam”, Vietnam Finance Association International – Danang University of Economics, 2016 Bài báo đăng: Truong Dinh Bao Long & Tran Hoai Nam, 2016 CEO Overconfidence and Corporate Capital Structure in Vietnam Banking Technology Review, No.121 (April), page 18-27 Truong Dinh Bao Long, 2018 The Relationship between Managers’ Overconfidence and Investment Decisions Journal of Development and Integration, No.38 (48) (Jan-Feb), page 73-80 Truong Dinh Bao Long, 2018 CEO Overconfidence Affects Financing Decision – Case Study of Companies in Vietnam Banking Technology Review, No.149 (August), page 50-63 ... CEO-level Control Yes Yes Yes Yes Yes Yes CEO-level Control*CF Yes Yes Yes Yes Yes Yes Firm-level Control Yes Yes Yes Yes Yes Yes Firm-level Control*CF Yes Yes Yes Yes Yes Yes 18 Year Fixed Efffects... in Vietnam under the effect of a financial deficit Determining the existence of the relationship between overconfidence and dividend decision in Vietnam Determining the existence of the relationship... Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes CEO-level Control CEO-level Control*CF Firm-level Control Yes Firm-level Control*CF Year Fixed Efffects Yes Year Fixed Efffects*CF Firm Fixed