Managerial Overconfidence for a Competitive Response and Firm Performance: An Empirical Evidence from Price Wars

Abstract

The managerial overconfidence hypothesis states that firms distort investment decisions on account of overestimation in their ability and future returns This article highlights how the relationship between managerial overconfidence motive underlying a competitive response and firm value is influenced by firm- industry- and action-response attributes An analysis of 165 pair-wise sample firms varied across 12 industries is employed to investigate whether the overconfidence motive drives executives to make a competitive response and how the contingent effects govern the relationship between managerial overconfidence and firm performance Our results show that firms suffer negative firm value when managerial overconfidence is involved in a price war because investors speculate it as a risky action under uncertainty However the corporate constitutions and appropriate response timing decisions can tamper investors’ unfavorable reactions The findings state that the impact of contingent factors such as financial distress financial constraint growth opportunity industrial competitiveness response delay and managerial ownership are statistically and economically sizable

Date of Award	2014 May 30
Original language	English
Supervisor	Shao-Chi Chang (Supervisor)