I declare that all data and materials are available. In the emerging market context, studies [77, 90] find a positive association between ownership concentration and accounting profit for Chinese public companies. Correspondence to The Department of Trade and Industry, London, Rihab BA, Lotfi BJ (2016) Managerial overconfidence and debt decisions. The debt financing proxy in this study is measured by the percentage of a total asset over the total debt of the firm following the past studies [69, 95]. Supporting this concept, Keasey and Wright [43] indicated corporate governance as a framework for effective monitoring, regulation, and control of firms which permits alternative internal and external mechanisms for achieving the proposed companys objectives. In many respects, this makes the BOD beholden to shareholders. The ownership concentration is positively related to firm performance. Hence, the study will help managers and owners in which situation managerial behavior helps more for firms value and protecting shareholders' wealth (Fig. CEO duality is negatively associated with firm performance. The boards of directors as central internal CG mechanisms have the responsibility to monitor, control, and supervise the managerial activities of firms. Regarding control variables, firm age has a positive and significant relationship with both TQ and ROA. Humanomics: Int J Syst Ethics 33(1)3855, Malmendier U, Geoffrey T (2005). volume7, Articlenumber:50 (2021) Though this finding shows high product market concentration positively contributed to market-based firm performance, this result is consistent with the previous study; Liu et al. J Corp Finan 12(3):381402, Giroud X, Mueller H (2011) Corporate Governance, Product Market Competition, and Equity Prices J Finance 66(2):563600, Hair JF, Black WC, Babin BJ, Anderson RE, Tatham RL (2006) Multivariate data analysis. GMM is considered more appropriate to estimate panel data because it removes the contamination through an identified finite-sample corrected set of equations, which are robust to panel-specific autocorrelation and heteroscedasticity [12]. The researcher also used only non-financial listed firms because financial firms have special regulations. The Impact of Internal Corporate Governance Mechanisms on the Performance of Firms: Evidence from the UK and Germany. This finding consistent with prior studies [15, 56] that indicated a negative relationship between CEO dual and firm performance, against to this result the studies [70] and [15] found that duality positively related to firm performance. Firm size has a significant positive relationship with firm performance ROA and negative significant relation with TQ. Econ Transit 15(3):461481, Tian JJ, Lau CM (2001) Board composition, leadership structure and performance in Chinese shareholding companies. Also, studies like [77, 86] examine empirically the effect of debt on firm investment decisions and firm value; reveal that debt finance is a negative effect on corporate investment and firm values [69] find that there is a significant and negative relationship between debt intensity and firm productivity in the case of Indian firms. Therefore, to test the endogeneity issue in the model, the DurbinWuHausman test was applied. Int Rev 26(4):236237, Legendre F, Ben-Barka H (2016) Effect of the board of directors and the audit committee on firm performance: a panel data analysis; J Manag Gov 21:737755, Li K, Lu L, Mittoo UR, Zhang Z (2015) Board independence, ownership concentration and corporate performance-Chinese evidence. This test indicates the result of AR (1) and AR (2) is tested for the first-order and second-order serial correlation in the first-differenced residuals, AR (2) test accepted under the null of no serial correlation. Chen, X., Chen, X., & Liu, Z. The fast growth of privatizations, the recent global financial crises, and financial institutions development have reinforced the improvement of corporate governance practices. Effective internal CG is essential in accomplishing company strategic goals. This situation resulted in increasing agency costs in the firm and damages the firm profitability over time. Thus, managerial overconfidence could have a positive influence on relationships between debt finance and firm performance; thus, the following hypothesis is proposed: Managerial overconfidence moderates the relationship between debt financing and firm performance. Broadly speaking, the BOD is responsible for dictating policies within the organization and determining plans and objectives (while also overseeing their implementation). It defines the Board of Directors role, its composition, Part of Moreover, the empirical results also showed managerial overconfidence negatively influences the relationship of board independence, dual leadership, and ownership concentration with firm performance. Good corporate governance means leaders are aware of the impact the company generates on its stakeholders, have the capacity to respond to stakeholder needs and are always prepared to face the various challenges that the future may bring. The mean value of managerial overconfidence is 0.589, which indicates more than 50% of Chinese top managers are overconfident. Herb Allen was elected as a Director of The Coca-Cola Company in 2021. Corporate governance has got attention and developed as an important mechanism over the last decades. Provided by the Springer Nature SharedIt content-sharing initiative. These two models cannot reject the hypothesis that the equations in levels are exogenous. The result indicated in Table 3 PMC and firm performance (ROA) relationship was positive, but statistically insignificant. [18] provided evidence that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality, and they provide evidence that the disciplinary force of competition on the management of the firm is from the fear of insolvency. Agency theory view proposed that duality could minimize the boards effectiveness of its monitoring function, which leads to further agency problems and enhance poor performance [41, 83]. Similarly, having at least some independent Directors (meaning arms length from the company) generally lends itself well to conflict resolution and objectivity when it comes to other strategic and executive considerations that are material to a business. Researchers [34,61] discussed the managerial behavioral bias has a great impact on firm corporate governance practices. The negative interaction results could be explained by the fact that overconfident leads managers to have lower debt due to overestimate the profitability of investment projects and underestimate the related risks. The BOD is also responsible for designing the management teams compensation structure and overseeing their performance. A strong leadership team and effective corporate governance function must identify and seize upon opportunities while simultaneously identifying and mitigating risks accordingly. The CEO reports to the Board of Directors (BOD). statement and Corporate governance is the domain of the Board of Directors, as opposed to its management team (such as the. Privacy As to the knowledge of the researcher, no study considered the influencing role of managerial overconfidence in between CG mechanisms and firm corporate performance. The interaction of managerial overconfidence and CEO duality has a significant negative effect on operational firm performance (0.0202, p>0.05) and a negative insignificant effect on TQ. Similarly, CEOs are the most decision-makers in the firm strategies. The board of directors must serve to reconcile management decisions with the objectives of shareholders and stakeholders, which can at times influence strategic decisions (Uribe-Bohorquez [85]). The model results show AR (2) test yields a p-value of 0.511 and 0.334, respectively, for ROA and TQ firm performance measurement, which indicates that the models cannot reject the null hypothesis of no second-order serial correlation. [38] noted that overconfident managers normally overestimate the profitability of investment projects and underestimate the related risks. This index measures the degree of concentration by industry. Table 3 shows p-values of 0.313 and 0.151, respectively, for ROA and TQ. 2) Hansen test over-identification is to detect the validity of the instrument in the models. Princeton University Press, Princeton, NJ. https://doi.org/10.1007/s10490-009-9135-6, Article This is because the bias raised in the dynamic panel model could be small when time becomes large [75]. What is the definition of Corporate Bell J Econ 14:366382, Heaton JB (2002) Managerial Optimistic and Corporate Finance. Second, this study provides evidence that how managerial behavioral bias interacts with CG mechanisms to affect firm performance, which has not been studied in previous literature. An example is doing whatever is necessary to meet quarterly targets set by the analyst community, under constant fear that the firms stock price could be punished for falling short. Corporate governance is a set of rules, practices, and processes used to direct and control an organisation. Corp Gov 4:4761, Aggarwal R, Erel I, Ferreira M, Matos P (2011) Does governance travel around the world? Secure warehousing of sensitive information, deployment of communication tools, and general data protection and integrity are all major topics of discussion in boardrooms around the world. Uribe-Bohorquez MV, Martnez-Ferrero J, Garca-Snchez IM (2018) Board independence and firm performance: The moderating effect of institutional context. Evidence from market-oriented and block holder-based governance regime. 2023 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. A board of directors protects the interests of a companys shareholders. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. https://doi.org/10.2139/ssrn.791924, Pant M, Pattanayak M (2010) Corporate governance, competition and firm performance. [63] studied CEO experience moderating the board monitoring effectiveness, and [60] studied the moderating role of product market competition in between internal CG and firm performance. He has been president of Allen & Co. LLC since 2002. Additionally, the variance inflation factor (VIF) test also shows all explanatory variables are below the threshold value of 10, [32] which indicates that no multicollinearity issue exists. It predicts that managerial overconfidence moderates the relation of product market competition and firm performance. Abstract. Every company exists in a dynamic environment, interacting with shareholders, employees, suppliers, communities, users, customers and other actors, and each company has effects on these people and on the spaces where it operates. It predicts that managerial overconfidence negatively influences the relationship of independent board and firm performance. [37], ownership concentration is measured through the total percentage of the 10 top block holders' ownership. Thus, the board is responsible for adopting control mechanisms to ensure that managements behavior and actions are consistent with the interest of the owners. Chin Manag Stud 13(2):299317, Shleifer A, Vishny R (1986) Large SHAREHOLDERS AND CORPORATE Control. Prior studies provided different empirical evidence such as [14], suggested that the monitoring efficiency of the board of directors is affected by internal and external factors like government regulation and internal firm-specific factors; the role of board monitoring is determined by ownership structure and firm-specific characters Boone et al. Thus, separating these two roles is better to avoid concentration of authority and power in one individual and separate leadership of board from the ruling of the business [72]. They blame the external advice and supervision, due to overestimating their skills and abilities, underestimate their risks [61]. This indicates that the previous year's performance of a Chinese firm has a significant impact on the current firm's performance. Hart [33] stated that competition inspires managers to work harder and, thus, reduces managerial slack. Accordingly, this study measures firm performance in terms of accounting base (return on asset) and market-based measures (Tobins Q). Due to shareholder concentrated economic risk, these shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging the wealth of shareholders. There are both internal monitoring Humanomics 33(1):3855, Nguyen TTM, Evans E, Lu M (2017) Independent directors, ownership concentration and firm performance in listed companies: evidence from Vietnam. Thus, the study used internal CG measures; independent board, dual leadership, ownership concentration, and product-market competition, and debt financing as a proxy of external CG measures. Central Eur J Oper Environ Manag 24(1):2843, Garca-Snchez IM, Martnez-Ferrero J (2017) Independent directors and CSR disclosures: the moderating effects of proprietary costs. Regarding debt financing, existing empirical evidence shows no specific pattern in the relation of managerial overconfidence and debt finance. Principle of Corporate governance; edited 2004, Retrieved from, http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf, Oliver B (2005) The impact of management confidence on capital structure. The basic rationale of corporate governance is to increase the performance of firms by structuring and sustaining initiatives that motivate corporate insiders to maximize firms operational and market efficiency, and long-term firm growth through limiting insiders power that can abuse over corporate resources. Three Types of Corporate Governance Mechanisms. This study proposed from the behavioral finance view that overconfidence is typical irrational behavior and that a corporate manager tends to show it when they make business decisions. Business Dictionary: Corporate Governance, Corporate Governance: Corporate Governance Defined. [71] concluded that managerial overconfidence can significantly affect corporate activities and outcomes. Hence, overconfident managers have better in accessing debt rather than rational managers in the context of China that leads creditors to allow to follow and influence the firm investments through collecting information about the firm and supervise the firms directly or indirectly. LX(6), Marnet O (2004) Behavioral aspects of corporate governance. It also requires a healthy working relationship between the Board and the CEO. However, managerial overconfidence positively moderates the impact of debt financing on firm performance measured by Tobins Q and negative influence on debt financing and operational firm performance relationship. Firm age is a measure of a natural logarithm of the number of years listed from the time that company first listed on the Chinese exchange market. School of Business, University of International Business and Economics, Beijing, 100029, China, You can also search for this author in 2023 BioMed Central Ltd unless otherwise stated. The negative relationship of independent board and firm performance results are based on the argument that external directors have no access to information about the internal business of the firms and their relation with internal management does not allow them to have a sufficient understanding of the firms day-to-day business activities or it may arise from the lack of knowledge of the business or the ability to monitor management actions [28]. Model, the recent global financial crises, and financial institutions development have reinforced the improvement Corporate... Recent global financial crises, and processes used to direct and control an organisation 2016 ) managerial and... And overseeing their performance of product market competition and firm performance not reject the that. 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