North American Journal of Economics and Finance 38 (2016) 5469

Contents lists available at ScienceDirect

North American Journal of Economics

and Finance
j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m / l o c a t e / e c o fi n

Overinvestment, inflation uncertainty, and managerial

overconfidence: Firm level analysis of Chinese corporations
Yizhong Wang a, Carl R. Chen b, Lifang Chen c, Ying Sophie Huang d,
a

College of Economics & Academy of Financial Research, Zhejiang University, China

School of Business, University of Dayton, USA
c
College of Economics, Zhejiang University, China
d
School of Management, Zhejiang University, China
b

a r t i c l e

i n f o

Article history:
Received 25 February 2016
Received in revised form 2 July 2016
Accepted 5 July 2016

JEL classification:
G30
D81
E31
E60
G18

a b s t r a c t
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 overinvestment 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.
2016 Elsevier Inc. All rights reserved.

Keywords:
Overinvestment
Inflation uncertainty
Managerial overconfidence

1. Introduction
Since corporate investment is one of the important factors affecting macroeconomic output growth, one of the primary targets of monetary policy is to keep inflation low and stable, because price instability increases contracting costs and decreases
economic efficiency (Reagan & Stulz, 1993). Similarly, a stable price level enables firms to recognize the best investment opportunities and invest in projects with the highest returns (Beaudry, Caglayan, & Schiantarelli, 2001). It is known that the change of
price plays an important role in corporate investment behavior and literature has shown that inflation and its uncertainty
would influence corporate output and investment behavior. Investment decisions, however, are made by managers, and price
changes in the economy can affect managers judgment. Failing to consider the managers role would miss an important link
between investment decisions and inflation. From the perspective of behavioral finance and through the lens of managers
internal traits, we are thus motivated to explore this specific mechanism of how price changes affect corporate investment
decisions. The dynamic effect of the interaction between managerial overconfidence and inflation uncertainty better describes
Corresponding author at: 866 Yuhangtang Road, Department of Finance and Accounting, School of Management, Zhejiang University, Hangzhou
310058, China.
E-mail address: sophiehuangying@zju.edu.cn (Y.S. Huang).
http://dx.doi.org/10.1016/j.najef.2016.07.001
1062-9408/ 2016 Elsevier Inc. All rights reserved.

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

55

the corporate investment decision, in particular in a country where private enterprises and state-owned enterprises (hereafter,
SOEs) encounter very different agency problems and exhibit divergent investment behaviors.
To this end, in this paper we explore the impact of managerial overconfidence on corporate investment decisions in the
presence of inflation uncertainty for Chinese firms. Many researches on psychology and corporate finance have already documented that overconfident managers tend to overestimate (underestimate) the probability of achieving good (poor) corporate performance, which leads to incorrect evaluations, unrealistic expectations and risky decisions (Cooper, Woo, &
Dunkelberg, 1988; Johnson & Fowler, 2011; March & Shapira, 1987). Furthermore, compared with other managerial characteristics, managers overconfidence is more susceptible to the influence of the external environment. More importantly, it is a
well-documented measurable managerial characteristic and has significant explanatory power for corporate financial policies (Malmendier, Tate, & Yan, 2011).
At the macro-level, inflation uncertainty is one of the most important external factors firms face when making investment
decisions. It is also one of the major monetary targets the Federal Reserve attempts to minimize. A number of recent papers
focus on how macroeconomic variables affect corporate behavior on the micro level. For example, Baum, Chakraborty, and
Liu (2010) study the influence of macroeconomic uncertainty on the capital structure of U.S. firms. Using quarterly reports,
Duchin, Ozbas, and Sensoy (2010) examine the impact of 20072008 financial crisis on corporate investments in the U.S.
Similarly, Gulen and Ion (2016) look at how economic policy uncertainty affects corporate investment in the U.S. using quarterly data. Tong and Wei (2011) analyze the impact of international capital inflow on corporate performance during the
financial crisis. Claessens, Tong, and Wei (2012) study the impact of financial crisis on corporate investment and return
based on firm-level data.
We contribute to the literature in two aspects. First, for the first time in the literature our paper studies a specific mechanism of price uncertainty affecting corporate investment behavior from the perspective of managerial overconfidence. Chinese managers are prone to overconfidence because of the implicit government backing. We show that these two factors
impact corporate investment decisions not only through their own impact but also their interaction effect. Clearly, the effect
of macroeconomic factors on corporate investments depends on managerial decision; while managerial behavior is not independent of external environment. An important link is missing if one studies the relation between price uncertainty and corporate investment decision without considering differences in managerial behavior. Second, given the different
organizational structure of Chinese firms, i.e., the existence of many SOEs, it is interesting to examine over-investment problem in China. The recent jittery in world financial markets highlights the importance of investments in Chinese firms. More
importantly, we are the first to study over-investment issue at the firm level in China from both the aspect of managerial
traits and inflation uncertainty. Due to differences in agency problem that results from government role, managerial attitude
and behavior could be quite different between a SOE and a private enterprise.
We summarize our findings as follows. First, adopting inflation uncertainty as an explanatory variable in a model for corporate investment behavior, we find that the regression coefficient is significantly negative; demonstrating that a lower
(higher) level of inflation uncertainty increases (reduces) corporate overinvestment. The intuitive explanation is that under
a highly uncertain external environment, it is very difficult for management to have a clear view of the change in the future
product market, and therefore they will not easily make investment decisions.
Second, we test the impact of managerial overconfidence on corporate investment distortions for Chinese firms. Studies
using Chinese data are scant. The ownership structure of Chinese firms makes it interesting to examine the impact of managerial overconfidence on corporate investment conditional on the ownership structure. The empirical literature points to a
positive link between managerial overconfidence and corporate overinvestment (Huang, Jiang, Liu, & Zhang, 2011;
Malmendier & Tate, 2005). In line with the methodology of Lin, Hu, and Chen (2005), we measure managerial overconfidence
based on earnings forecast biases and the regression coefficient turns out to be significantly positive, which supports the
view that managerial overconfidence leads to overinvestment. Furthermore, subsample analyses on SOEs and non-stateowned enterprises (hereafter, non-SOEs) reveal some interesting findings. It is especially evident that in SOEs managerial
overconfidence contributes to corporate overinvestment, although no obvious evidence is found showing that inflation
uncertainty impact overinvestment for this group of firms. In other words, our finding suggests investment of non-SOEs
is more sensitive to inflation uncertainty than SOEs, while private enterprises (or non-SOEs) are less sensitive to managerial
overconfidence than SOEs.
Third, since managerial optimism is not independent of external environment, we study the effect on investment efficiency from the interaction of managerial overconfidence and inflation uncertainty. We find that while the coefficient of
inflation uncertainty stays negative, the coefficient of the interaction term is significantly positive, indicating that managerial
overconfidence can weaken the negative effect of inflation uncertainty on overinvestment. This implies that with higher
inflation uncertainty, overinvestment declines less in firms whose managers are overconfident. In other words, during periods of low inflationary uncertainty, corporations are more likely to over-invest and managerial overconfidence exacerbates
overinvestments. Lastly, we also find asymmetric influences of economic cycles on the relation between inflation uncertainty
and overinvestment.
To corroborate our findings, we then carry out a battery of robustness tests. In terms of methodologies and potential
endogeneity concerns, we implement a logit model and a two-stage-least-squares (2SLS) model with inflation uncertainty
instrumented. For the measurement of managerial overconfidence, we also use some alternative proxies. For the alternative
measurement of inflation uncertainty, we compute the conditional variance of the growth rate of GDP deflator in a GARCH

56

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

(1,1) model. We also provide an alternative estimate of overinvestment using Tobins q instead of sales growth. All the
repeated regressions produce consistent results and inferences.
The paper proceeds as follows. Section 2 presents the relevant literature and develops our research hypotheses. Section 3
describes the data and our choice of variables. Section 4 discusses the empirical results, while Section 5 conducts robustness
tests. Section 6 concludes.
2. Literature review and hypothesis development
2.1. The effect of inflation uncertainty on investment
Inflation is one of the most important external factors that firms need to consider when making investment decisions as it
largely affects production scale and capital projects (Poensgen & Straub, 1976; De Gregorio, 1993; Summers, 1981). In particular, inflation uncertainty is documented as a key factor of output uncertainty (Shields, Olekalns, Henry, & Brooks, 2005).
With more predictable general price levels, it is easier for firms to channel investment towards the most profitable opportunities (Beaudry et al., 2001). Furthermore, inflation uncertainty distorts the effectiveness of the price mechanism in allocating resources and creates economic inefficiency (Bredin & Fountas, 2009). Friedman (1977) argues that increased inflation
volatility can cause more noise in market signals, which renders the economic system less efficient. At the same time, we
note that high inflation can cause managers to alter their expectations about inflation uncertainty in the future
(Friedman, 1963), and such uncertainty in turn affects the ability of managers to correctly predict price changes. When
the product price changes, managers cannot predict prices of their own products, complementary products and competitive
products, so they do not know whether they should produce, and choose to put off investment or generally sign short-term
_
contracts to reduce investment (Cizkowicz
et al., 2010). Fischer (2013) shows that time periods of increased inflation uncertainty witness substantial reductions in total investment. By decomposing inflation uncertainty into permanent and temporary components, Byrne and Davis (2004) find that both components have a negative effect on corporate investment while
the impact of temporary uncertainty is more significant. More recently, Gulen and Ion (2016) find that policy uncertainty
reduces corporate investment. Therefore, inflation uncertainty can be conducive to a reduction of corporate investment. Less
known, however, is if this relationship also exists in a mixed planned-market economy. The impact of inflation on the economy is a well-researched topic in the economics literature. This topic is particularly relevant for China because her economic
growth is credit-fueled and investment driven. Studies pertinent to Chinese economy also find considerable welfare cost of
inflation (e.g., Chen, Li, Shi, & Zhou, 2014) and negative impact of high inflation on economic growth (e.g., Hwang & Wu,
2011). As the worlds second largest economy, the slowdown of the Chinese economy has significant bearing on other economies. Forty percent of the revenue generated by S&P500 companies is from overseas. Examining the relation between inflation uncertainty and corporate investment for Chinese firms, which has not been researched, is thus important. We propose
our first hypothesis as follows:
Hypothesis 1. Inflation uncertainty is negatively associated with corporate overinvestment. That is, inflation uncertainty
reduces the likelihood of overinvestment
2.2. The interaction of managerial overconfidence and inflation uncertainty
Our second hypothesis is inspired by the existing body of literature that examines the relation between managerial overconfidence and corporate investment and financing decisions. In this strand of literature, the theoretical model of Heaton
(2002) reveals that when managers regard their investment projects as underestimated and the cost of external financing
is high, the sensitivity of investment-cash flow would increase and overconfident managers tend to overestimate investment
project returns. Overconfident managers are also likely to overestimate their own managerial skills and the profitability of
the firm (Russo & Schoemaker, 1992), and they are more confident to defeat their competitors (Camerer & Lovallo, 1999).
Moreover, overconfident managers overestimate the returns to their investment projects and over-invest when they have
abundant internal funds (Malmendier & Tate, 2005). Overconfident CEOs overpay for target companies and undertake
value-destroying mergers (Malmendier & Tate, 2008). Similarly, Wang, Zhang, and Yu (2009) find that overconfident managers tend to over-invest and overinvestment is highly sensitive to cash flows generated by financing activities. Chen and Lin
(2012) show that most CEOs are optimistic and a firm with a highly optimistic CEO tends to invest more. Other empirical
studies find evidence that managerial overconfidence causes the distortion of corporate investment behavior, and such distortion varies between companies (Huang et al., 2011; Lin et al., 2005; Nofsinger, 2005).
Despite the abundant research relating inflationary uncertainty to overinvestment, and managerial overconfidence to
overinvestment, they are researched as two independent and un-related topics. Important as the effect of macroeconomic
factors on corporate investment is, the ultimate investment decision is still made by the managers, hence firms reach different investment decisions although they face the same macroeconomic environment. At the same time, managerial risk appetite can be influenced by the macroeconomic environment. We note that the extant literature puts more emphasis on the
microeconomic consequences due to managerial overconfidence (i.e., the effect on corporate investment decision, investment behavior and investment efficiency). However, managerial overconfidence depends not only on managers own traits

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

57

(e.g., the individuals internal overconfidence), but also on the external environment (e.g., factors that intensify or alleviate
overconfidence, Hribar and Yang, 2016). As Bassie (1955) emphasizes, expectations are swayed by the objective environment, prompting businessmen to expand and simultaneously anticipate such expansion would be profitable. Therefore, it
is not the optimistic psychology that brings up the prosperity; rather the prosperity creates a wave of optimism. On the other
hand, when an economic recession hits, it is not due to the loss of confidence, but because the basic economic forces have
changed. Klayman, Soll, Gonzlez-Vallejo, and Barlas (1999) contend that in uncertain environments managers are prone to
be more aggressive and overconfident, resulting in poor judgment and investment decisions. Compared with stable environments, high dispositional optimism may cause entrepreneurs with high self-efficacy to become overconfident under
dynamic environments (Hmieleski & Baron, 2008). Nofsinger (2005) shows that an individuals attitudes are not based solely
on independent analysis; interaction with others has a strong influence and leads to a shared emotion, or social mood, and
social mood changes through time. Thus, managerial investment decisions related to overconfidence are potentially the outcome of the joint action of managers intrinsic trait of overconfidence and external environmental factors as well as the interaction between them (Libby & Rennekamp, 2012).
Instead of merely examining these two seemingly unrelated impacts on corporate investment independently, based on
the above arguments we posit that their dynamic interaction more accurately describes the corporate investment decision.
As indicated in the introduction, since the impact of economic forces on corporate investment depends on managerial decision and managerial optimism is not independent of external environment, we intend to study the neglected link between
them, that is, the dynamic effect of the interaction of managerial overconfidence and inflation uncertainty on investment
efficiency. We argue that the negative effect of inflation uncertainty on corporate investment may be reduced by the overinvestment tendency of overconfident managers, hence overinvestment declines less in firms whose managers are overconfident. In other words, during periods of low inflationary uncertainty, corporations are more likely to overinvest and
managerial overconfidence exacerbates such overinvestment. We propose our second hypothesis as:
Hypothesis 2. Since overconfident CEOs are more likely to overinvest, managerial overconfidence mitigates the negative
effect of inflation uncertainty on corporate overinvestments.
2.3. The effect of state ownership
Next we consider the effect of state ownership. The diverse shareholding structure in Chinese listed companies are distinctively different from other countries (Qi, Wu, & Zhang, 2000), and different companies have different goals and motivation to exercise their control rights (Chen, Firth, & Xu, 2009). As such, we believe that SOEs investment decision and
managerial behavior deserve special attention. Compared with private firms, SOEs are less affected by liquidity constraints,
while the growth of private firms depends on the availability of internal finance. Especially, most boards of directors in SOEs
are appointed politically, so they are expected to accomplish many social and political goals at the expense of corporate
interests (Chen, Firth, & Rui, 2006). Agency costs thus differ along with the holding structure (Ang, Cole, & Lin, 2000). Moreover, the agency cost in SOEs is obviously higher than that in non-SOEs and managerial overconfidence in SOEs are more
prone to cause overinvestment and decrease investment efficiency (Huang et al., 2011). On the other hand, SOEs and
non-SOEs differ in investment decisions under external uncertainty, and the investment behavior of SOEs appears to be less
responsive to changes in uncertainties (Bo & Zhang, 2002). Since SOEs account for a large proportion of listed companies in
China, therefore, it is prudent to examine how the unique shareholding structure in Chinese firms affects the relation
between managerial overconfidence, inflation uncertainty and investment behavior.
The idea is that under an inflation uncertainty environment, the investment decisions of SOEs and non-SOEs are bound to
differ and the impact of managerial overconfidence on the sensitivity between inflation uncertainty and investment efficiency would exhibit distinct patterns in SOEs and non-SOEs. With implicit government back-up for the SOEs, we posit that
the effect of managerial overconfidence is more visible in SOEs compared to non-SOEs. Therefore, we form the third and
fourth testable hypotheses as follows.
Hypothesis 3. The impact of managerial overconfidence on corporate overinvestment is more evident in SOEs.
Hypothesis 4. Managerial overconfidence in SOEs is more likely to exacerbate (reduce) overinvestment during periods of
low (high) inflation uncertainty.
2.4. The effect of economic cycles
Finally, we consider the effect of economic cycles. According to Kaniel, Massey, and Robinson (2010), dispositional optimism is a stable individual trait, robust to personal events such as class grades and recruiting success. However, one may
argue that managerial overconfidence varies in different economic cycles, as peoples expectation for the future is different
when the economic condition changes.

58

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

Extant studies generally suggest a positive association between managerial optimism and economic cycles. For example,
Malmendier and Nagel (2011) investigate whether individual experiences of macroeconomic shocks affect financial risk taking and find that individuals who have experienced low stock market returns throughout their lives report lower willingness
to take financial risk, and are more pessimistic about future stock returns. Schoar and Zuo (2011) show that CEOs who begin
their careers during recessions tend to have more conservative management styles with less investment. Broer and Kero
(2012) contend that the fall in US macroeconomic volatility from the mid-1980s coincides with a strong rise in asset prices.
The rise and the crash that followed have been attributed to overconfidence in a benign macroeconomic environment of low
volatility. A recent study documents the relation between CEOs risk aversion and their early-life disasters experience
(Bernile, Bhagwat, & Rau, in press). It is clear that CEOs behavior, including tendency of overconfidence, is dependent on
the experiences with external environment. The impact of managerial overconfidence on the relation between inflation
uncertainty and corporate investment may thus be affected by the economic environment. On the basis of our discussions
above, we formulate our last hypothesis regarding the expected cyclical pattern of corporate investment behavior as follows
Hypothesis 5. The impact of inflation uncertainty on corporate overinvestment differs in economic cycles. Specifically,
during the high-growth period, managerial overconfidence overshadows the negative effect of inflation uncertainty on
corporate overinvestment, but during the low-growth period, the effect is mute.

3. Sample selection and variables

3.1. Sample
Our sample comprise of quarterly data during 20032012 of listed companies in Shanghai and Shenzhen A-share markets,
with ST companies1 and financial companies excluded. There are a maximum of 2332 listed companies in our final sample. As
the sample period spans over 10 years, the number of companies in each year is not equal. Given the short-term nature of inflationary uncertainty, quarterly data facilitate our exploration of the impacts of macroeconomic variables on firm investment
behavior. Another advantage of using quarterly data is that our sample size would be reasonably large as opposed to using
annual data. It is noticed that some recent studies also rely on quarterly data to study the influence of macroeconomic variables
on corporate investment activities (Duchin et al., 2010; Gulen & Ion, 2016).
In the present study, we choose 2003 as the starting year of our sample due to the fact that from 2003 China Securities
Regulatory Commission (hereafter, CSRC) imposed mandatory disclosure of quarterly financial reports. Meanwhile, we need
earnings forecast data to measure managerial overconfidence. Chinese firms started reporting such data in 2001 and it was
fully on track during 2002. We obtain these data from the Wind database.
3.2. Variable definitions
3.2.1. Overinvestment
We construct an expected investment model based on Biddle, Hilary, and Verdi (2009) and Gomariz and Ballesta (2014).
The unexpected investment is measured as the deviation of actual investment from the expected investment given the firms
investment opportunities (measured by sales growth). The expected investment model is written as:

Inv i;t b0 b1 sales growthi;t1 ei;t

Inv i; t is the new investment expenditure for company i for quarter t, calculated as the single-quarter capital expenditure
divided by total assets at the beginning of the quarter, and sales_growthi, t1 is the growth rate of sales during the last quarter.
Eq. (1) is estimated for each industry-year based on the CSRC industry classification for all industries with at least 20 observations in a given year. A positive (negative) residual would indicate over- (under-) investment as in Gomariz and Ballesta
(2014). Since our main interest is a corporations overinvestment, we define the variable overinvestment (Over Invest) as a
dummy that takes on the value of 1 if the residual is positive, 0 otherwise. In the robustness test, we follow Biddle et al.
(2009) and estimate the model using Tobins q as a proxy for investment opportunities instead of sales growth, and find similar results.
3.2.2. Inflation uncertainty
Following prior literature (Bredin & Fountas, 2009; Talavera, Tsapin, & Zholud, 2012; Yoon & Ratti, 2011), we adopt the
generalized autoregressive conditional heteroskedasticity model, namely GARCH (1,1) to obtain the conditional variance of
the consumer price index (CPI) changes and use it as a proxy of inflation uncertainty. The GARCH (1,1) model can be written as
follows:

Special treatment companies, i.e. companies with financial trouble or abnormal situations.

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

pt a0 ai

n
X

pti et

59

i1

v t s0 s1 e2t1 s2 v t1

where pt is the quarter-on-quarter growth of the consumer price index; et is the error term and v t is the conditional variance
of the error term estimated from the GARCH model. In the robustness tests, we also use GDP deflator instead of CPI in the
framework of GARCH (1,1) to generate an alternative proxy for inflation uncertainty and find consistent results.
3.2.3. Managerial overconfidence
We follow Lin et al. (2005) and Huang et al. (2011) to measure managerial overconfidence. We compare the actual net
profit with the forecasted net profit in the Wind database to gauge if the management is overconfident. Our sample considers
only companies that disclose net profit forecasts before the reporting period. For example, the 2003 annual report is released
before April 30, 2004. If the company discloses its forecast after December 31, 2003, we argue that managers would have had
a better idea of the performance of the company in 2003 ex post, such that the forecast made in earlier months of 2004 is not
a good measurement for their overconfidence. We compare the forecasted net profit with the actual net profit, and if the
former is larger than the latter, it implies that the management is overconfident. The dummy variable, overconfidence, takes
on the value of 1 if the deviation in net profit forecast is positive, 0 otherwise.2 In the section of robustness tests, we include
two additional measures of managerial overconfident. These two measures are explained in more details in Section 5.2.
3.2.4. Control variables
Consistent with the existing literature, we incorporate some firm characteristics as control variables. These variables consist of sales, proxy for financing constraint (Hadlock & Pierce, 2010), operating cash flow, leverage, book-to-market ratio
(BM), ROA, agency costs measured by overhead expenses divided by total assets, and tangibility defined as fixed asset over
total asset. All the control variables are lagged one period. The definitions of all the variables are summarized in Table 1.
3.3. Summary statistics
Table 2 presents the descriptive statistics for our variables. We winsorize the control variables at the 1% and 99% levels to
mitigate the undue influences of outliers. Since the dataset is an uneven panel data, all variables do not have the same number of observations. As can be seen, on average approximately 43.3% and 22.8% of the firms in the sample period exhibit overinvestment and managerial overconfidence, respectively. The GARCH model generated inflation uncertainty variable,
ranging from 0.564 (minimum) to 2.846 (maximum), is suggestive of large variations of the inflationary environment during
the sample period. It should be noted that two different measurements of overinvestment (Over Invest and Over Invest2) produce almost identical means and standard deviations.
Table 3 shows the correlation coefficients matrix of the independent variables. The table shows that most of the correlation coefficients between the explanatory variables are small (in the single digit); the highest being the correlation
between tangibility and leverage (0.44). The generally low correlations between explanatory variables suggest that multicollinearity should not be a concern.
4. Empirical results
4.1. Direct impact of inflation uncertainty on investment efficiency
Table 4 reports the empirical results of corporate overinvestment due to inflation uncertainty and managerial overconfidence. We implement a linear probability model (LPM) as the dependent variable, Over Invest, is a binary dummy. We also
apply a logit model in the robustness test and the results are consistent. We present the results of both approaches as each
has its own merits. While those who prefer LPM argue that it is more robust to deviations from assumptions and the interpretation of the parameters is more straightforward than logit model, others disagree. Column (1) is the regression of Inflation uncertainty on Over Invest after controlling for firm characteristics as well as the time and industry effects. Standard
errors are also clustered at the firm level. The coefficient of Inflation uncertainty turns out to be significantly negative at
the 1% level, implying that inflation uncertainty reduces the probability of corporate over-investing. In terms of the economic
significance, the coefficient estimate (0.080) implies that a one-standard deviation increase in Inflation uncertainty is predicted to decrease the probability of overinvestment by 4.56%. This is equivalent to a 10.53% decrease over the sample mean.
This occurs because as the inflationary environment becomes more uncertain, it is difficult for managers to accurately predict the future market so that they tend to postpone investment instead of making investment decisions hastily. This finding

2
This measure implies that managerial overconfidence may change over time, which is consistent with the argument that the extent of confidence is
external environment dependent.

60

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

Table 1
Variable definitions.
Variable

Definition

Over Invest
Inflation
uncertainty
Overconfidence

An indicator variable that takes on the value of 1 if the deviation between the actual and the expected investment in Eq. (1) is
positive, and 0 otherwise
We adopt the generalized autoregressive conditional heteroskedasticity model, namely GARCH (1,1) to obtain the conditional
variance of the consumer price index changes and use it to proxy inflation uncertainty.
Takes on the value of 1 if the deviation between the forecasted net profit and the actual net profit is positive, 0 otherwise

Sales

Sales divided by total assets

Constraint

A proxy for financing constraints (Hadlock & Pierce, 2010), SA-index = (0.737*Size) + (0.043*Size2)  (0.040*Age), where Size is
the natural logarithm of firm asset (adjusted based on the CPI in Quarter 1, 2000) and Age refers to the listing years (1
quarter = 0.25 year)
Operating cash flow divided by last periods total assets
Liability divided by total assets
Owners equity divided by the market value of equity
Return on asset, equaling to the companys net profit divided by last periods asset
Overhead expense divided by last periods total assets
Fixed assets divided by last periods total assets

Cash
Leverage
BM
ROA
Agency cost
Tangibility
M2 uncertainty
GDP deflator
Overconfidence2
Overconfidence3
Over Invest2

The conditional variance of the growth rate of U.S. M2 in a GARCH(1,1)model

The conditional variance of the growth rate of GDP deflator in a GARCH(1,1) model
A dummy which takes on the value of 1 if the firms forecasted net profit is larger than the mean of analysts forecasted net profit,
0 otherwise. (yearly data)
A dummy which takes on the value of 1 if managers increase holdings of the stocks of their firms, 0 otherwise
Estimating Eq. (1) with Tobins q instead of sales growth produces new residuals. It is a dummy that takes on the value of 1 if the
residual is positive, 0 otherwise

Table 2
Descriptive statistics.
Variable

Mean

St. dev

Median

Max

Min

Over Invest
Inflation uncertainty
Overconfidence
Sales
Constraint
Cash
Leverage
BM
ROA
Agency cost
Tangibility
GDP deflator
Overconfidence2
Overconfidence3
Over Invest2

54,695
93,280
11,461
61,589
66,324
62,604
65,487
60,078
62,514
62,604
65,452
93,280
2432
55,059
60,293

0.433
1.279
0.228
0.197
1.946
0.012
0.474
0.682
0.012
0.013
1.056
0.876
0.103
0.030
0.425

0.495
0.570
0.419
0.163
0.690
0.049
0.215
0.708
0.021
0.010
0.924
0.669
0.304
0.171
0.494

0.000
1.062
0.000
0.154
1.959
0.011
0.483
0.425
0.009
0.011
0.850
0.680
0.000
0.000
1.000

1.000
2.846
1.000
0.923
0.058
0.173
1.136
3.931
0.090
0.060
5.857
2.510
1.000
1.000
1.000

0.000
0.564
0.000
0.003
3.397
0.145
0.044
0.106
0.071
0.001
0.134
0.100
0.000
0.000
0.000

Table 3
Correlation matrix.
Inflation
uncertainty
Inflation
uncertainty
Overconfidence
Sales
Constraint
Cash
Leverage
BM
ROA
Agency cost
Tangibility
GDP deflator

Overconfidence

Sales

Constraint

Cash

Leverage

BM

ROA

1.000
0.011
0.043
0.037
0.060
0.063
0.026
0.049
0.054
0.008

1.000
0.112
0.235
0.059
0.019
0.234
0.217
0.045
0.053

1.000
0.027
0.346
0.260
0.016
0.231
0.323
0.030

1.000
0.059
0.001
0.217
0.132
0.038
0.037

1.000
0.028
0.393
0.038
0.444
0.202

1.000
0.168
0.085
0.166
0.051

1.000
0.027
0.221
0.042

Agency
cost

Tangibility

GDP
deflator

1.000
0.041
0.015
0.026
0.026
0.015
0.224
0.076
0.042
0.021
0.221

Note: This table reports correlation coefficients between the main variables which are defined in Table 1.

1.000
0.091
0.017

1.000
0.129

1.000

61

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469
Table 4
Inflation uncertainty and overconfidence on corporate overinvestment.
Over invest

(1)

Inflation uncertainty

0.080***
(10.10)

(2)

0.293***
(9.70)
0.020*
(1.78)

Overconfidence
Inflation uncertainty*Overconfidence
Sales
Constraint
Cash
Leverage
ROA
BM
Agency cost
Tangibility
Constant
Industry effect
Year and quarter effect
Cluster by firm
Observations
R-squared

(3)

0.125***
(3.64)
0.017
(1.54)
0.153***
(2.85)
0.305***
(10.80)
2.932***
(14.15)
0.025***
(2.93)
0.297
(0.61)
0.080***
(11.61)
0.408***
(10.59)
Yes
Yes
Yes
54328
8.0%

0.151***
(3.10)
0.011
(0.67)
0.020
(0.19)
0.261***
(6.88)
2.893***
(8.78)
0.000
(0.01)
0.110
(0.16)
0.0520***
(6.34)
0.383***
(6.67)
Yes
Yes
Yes
11087
10.4%

0.015*
(1.94)
0.154***
(3.17)
0.008
(0.53)
0.012
(0.11)
0.264***
(6.93)
2.813***
(8.50)
0.003
(0.25)
0.165
(0.23)
0.052***
(6.31)
0.647***
(10.16)
Yes
Yes
Yes
11087
11.1%

Notes: This table shows the main empirical results from a linear probability model. Variable definitions are in Table 1. The dependent variable is Over Invest.
All the independent variables are lagged by one period. All regressions include year and quarter dummy and industry dummy. Robust t-statistics adjusted
for firm-level clustering are reported in parentheses.
*
Statistical significance at the 10% level.
***
Statistical significance at 1% level.

supports the prediction in our first hypothesis that inflation uncertainty reduces the likelihood of overinvestment in Chinese
firms.
4.2. Effect of managerial overconfidence
In Column (2) of Table 4, we investigate the direct impact of managerial overconfidence on corporate overinvestment.
Consistent with Hypothesis 2, a significant (at the 10% level) and positive coefficient for the overconfidence variable indicates
that optimistic managers are more likely to over-invest.
As discussed in the previous section, the impact of inflationary uncertainty on firm investment depends on managerial
behavior, hence managerial overconfidence plays an important role on such effect. To account for this dynamic relation,
we model this effect through an interaction term between Inflation uncertainty and Overconfidence. We do not include Overconfidence in the specification, because the correlation coefficient between Overconfidence and Inflation Uncertainty*Overconfidence is 0.902. Multicollinearity would be a serious problem if we put Overconfidence into the same regression
equation.3 Similar treatments can also be found in other studies, such as Duchin et al. (2010), Tong and Wei (2011) and
Cavallo, Galindo, Izquierdo, and Len (2013).
As shown in Column (3) of Table 4, the coefficient of the interaction term (0.015) is positive and significant at the 10%
level, showing that managerial overconfidence can dampen the negative effect of inflation uncertainty on the tendency of
overinvestment. The overall effect of inflation uncertainty on Over Invest among firms that have overly optimistic managers
(as measured by the sum of the coefficients on Inflation uncertainty and on the interaction term) is negative (0.278) and
significant (with an F-statistic of 81.94 and a p-value of 0.00). In other words, although managerial overconfidence enhances
the likelihood of corporate overinvestment behavior, but this mechanism (i.e. managerial overconfidence) can in turn

3
This model specification is equivalent to a varying parameter model in which the impact of managerial overconfidence on overinvestment is through the
coefficient of inflation uncertainty. If we let Overinvestment = a + b Inflation Uncertainty, and b = c + d Managerial Overconfidence, we obtain Overinvestment = a + c
Inflation Uncertainty + d (Inflation Uncertainty*Managerial Overconfidence) by substituting the latter equation into the former.

62

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

Table 5
Overinvestment in SOEs and non-SOEs.
SOEs
Over invest

(1)

Inflation uncertainty

0.028***
(2.91)

Non-SOEs
(2)

Cash
Leverage
ROA
BM
Agency cost
Tangibility
Constant
Industry effect
Year and quarter effect
Cluster by firm
Observations
R-squared

0.097***
(6.77)

(5)

0.106**
(2.39)
0.074***
(4.74)
0.331***
(4.66)
0.250***
(6.26)
3.147***
(11.04)
0.026***
(2.84)
0.886
(1.42)
0.094***
(11.51)
0.218***
(4.31)
Yes
Yes
Yes
30926
9.6%

0.133*
(1.91)
0.023
(0.97)
0.308*
(1.92)
0.247***
(4.32)
3.445***
(7.48)
0.008
(0.53)
1.301
(1.28)
0.062***
(6.10)
0.217***
(2.92)
Yes
Yes
Yes
4733
11.9%

(6)
0.317***
(7.14)

0.010
(0.59)
***

Inflation uncertainty*Overconfidence

Constraint

(4)

0.052
(1.24)
0.049***
(2.88)

Overconfidence

Sales

(3)

0.032
(2.81)
0.134*
(1.93)
0.024
(1.02)
0.308*
(1.91)
0.248***
(4.32)
3.434***
(7.45)
0.007
(0.49)
1.283
(1.26)
0.062***
(6.07)
0.265***
(3.23)
Yes
Yes
Yes
4733
11.9%

0.138**
(2.54)
0.017
(0.88)
0.019
(0.22)
0.302***
(7.61)
2.322***
(8.09)
0.039**
(2.20)
0.238
(0.31)
0.043***
(3.92)
0.525***
(8.17)
Yes
Yes
Yes
20290
9.1%

0.169**
(2.32)
0.022
(0.87)
0.150
(0.98)
0.252***
(4.60)
2.089***
(4.25)
0.020
(0.68)
0.319
(0.31)
0.037***
(2.59)
0.430***
(4.11)
Yes
Yes
Yes
5509
10.1%

0.006
(0.55)
0.173**
(2.37)
0.019
(0.74)
0.175
(1.14)
0.263***
(4.78)
1.944***
(3.96)
0.034
(1.12)
0.190
(0.19)
0.037***
(2.58)
0.721***
(6.33)
Yes
Yes
Yes
5509
10.9%

Notes: This table reports the estimation results on over-investment for SOEs and non-SOEs. Variable definitions are in Table 1. The dependent variable is
Over-Invest. All the independent variables are lagged by one period. All regressions include year and quarter dummy and industry dummy. Robust tstatistics adjusted for firm-level clustering are reported in parentheses.
*
Statistical significance at the 10% level.
**
Statistical significance at the 5% level.
***
Statistical significance at 1% level.

attenuate the negative association between inflation uncertainty and overinvestment. Thus, the findings in Table 4 provide
support for Hypotheses 1 and 2.
4.3. The effect of firm ownership
As indicated in the introduction section, agency cost differs along with the holding structure of Chinese firms, and the cost
for SOEs is higher than that for non-SOEs. In Table 5 we report the regression results on subsamples for SOEs and non-SOEs.
In Columns (1) and (4), the coefficients on inflation uncertainty are both significant (at 1% level) and negative for non-SOEs
and SOEs, with the absolute value of the coefficient being larger in the non-SOEs and their difference being significant at the
1% level (p-value = 0.0001). Furthermore, we observe significant (at 1% level) and positive coefficient on Overconfidence in the
SOEs but not in private firms (Column (2) vs. Column (5)), and the difference between them is significant with a p-value of
0.097, indicating that managerial overconfidence exerts a larger influence on SOEs when it comes to overinvestment. This
result supports our Hypothesis 3.
When we turn our attention to Columns (3) and (6), we find that the interaction term between Inflation uncertainty and
Overconfidence is significant and positive for SOEs (at 1% level) while not significant for non-SOEs, and the difference between
them is significant at the 10% level (p-value = 0.092). These findings suggest that managerial overconfidence has a larger
effect for state controlled firms, which is plausible as they suffer from greater agency cost than private firms and they are
also less sensitive to the changing external macroeconomic conditions due to implicit government backup. Therefore, the
evidence lends support to our Hypothesis 4 that distinctive patterns exist for SOEs and non-SOEs in terms of inflation uncertainty and corporate investment efficiency in the presence of managerial overconfidence.
4.4. The effect of economic cycles
Arguably, the global financial implosion corresponds to a watershed in dispositional optimism and leads to a growth cycle
trough in the fall of 2008. In particular, the Shanghai Stock Exchange A-share dropped drastically by two thirds in 2008 from

63

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469
Table 6
Overinvestment in different economic cycles.
20032007
Over invest

(1)

Inflation uncertainty

0.009
(0.79)

20082012
(2)

Cash
Leverage
ROA
BM
Agency cost
Tangibility
Constant
Industry effect
Year and quarter effect
Cluster by firm
Observations
R-squared

0.224***
(19.91)

(5)

0.158***
(3.43)
0.049***
(3.01)
0.204**
(2.54)
0.267***
(6.75)
4.148***
(13.31)
0.0224***
(2.69)
2.283***
(3.64)
0.075***
(8.17)
0.201***
(4.10)
Yes
Yes
Yes
20288
10.3%

0.226***
(3.17)
0.029
(1.24)
0.311*
(1.73)
0.320***
(5.91)
3.740***
(8.57)
0.011
(0.74)
2.977***
(3.14)
0.042***
(3.87)
0.211***
(2.76)
Yes
Yes
Yes
3469
14.5%

(6)
0.558***
(14.55)

0.005
(0.41)
***

Inflation uncertaintyOverconfidence

Constraint

(4)

0.054
(0.95)
0.071***
(3.19)

Overconfidence

Sales

(3)

0.076
(3.47)
0.226***
(3.16)
0.028
(1.22)
0.313*
(1.74)
0.320***
(5.90)
3.768***
(8.63)
0.011
(0.77)
2.915***
(3.07)
0.043***
(3.90)
0.168*
(1.90)
Yes
Yes
Yes
3469
14.5%

0.084**
(2.12)
0.001
(0.05)
0.161**
(2.48)
0.297***
(8.63)
2.482***
(10.18)
0.010
(0.50)
0.555
(0.92)
0.079***
(9.49)
0.572***
(12.05)
Yes
Yes
Yes
34040
8.2%

0.064
(1.08)
0.043**
(2.07)
0.044
(0.33)
0.173***
(3.39)
2.743***
(6.35)
0.0727**
(2.12)
0.679
(0.73)
0.060***
(5.23)
0.467***
(6.62)
Yes
Yes
Yes
7618
9.0%

0.009
(1.13)
0.070
(1.19)
0.041**
(1.96)
0.046
(0.35)
0.182***
(3.56)
2.596***
(5.97)
0.0575*
(1.66)
0.776
(0.83)
0.061***
(5.36)
0.898***
(11.50)
Yes
Yes
Yes
7618
11.4%

Notes: This table reports the estimation results on overinvestment in two economic cycles, namely 20032007, and 20082012. Variable definitions are in
Table 1. The dependent variable is Over-Invest. All the independent variables are lagged by one period. All regressions include year and quarter dummy and
industry dummy. Robust t-statistics adjusted for firm-level clustering are reported in parentheses.
*
Statistical significance at the 10% level.
**
Statistical significance at the 5% level.
***
Statistical significance at 1% level.

the previous peak and struggled to maintain that level until years later (Guo & Huang, 2010). The Chinese economy, however,
has quickly resumed its growth momentum since late 2008, partly because the central government launched an aggressive
RMB4tn (US$586bn) investment plan in response to the slump in economic growth. As such, to assess the impact of inflation
uncertainty on corporate investment under different economic cycles, we partition our whole sample into two periods based
on the real GDP growth rate of China, which largely accelerated from 2003 to 2007 and decelerated from 2008 to 2012 in our
sample period. The relevant results are shown in Table 6. It can be seen that during the high growth subperiod (20032007),
inflation uncertainty does not affect overinvestment, but Overconfidence and the interaction term between Inflation uncertainty and Overconfidence both have significant and positive effects on the probabilities of overinvestment as predicted for
the whole sample. Meanwhile, the significant and negative impact of inflation uncertainty on corporate overinvestment is
observed in the post-2007 period (Column 4). The impact of overconfidence, however, is lacking during this period, indicating that compared with inflation uncertainty, managerial overconfidence has a minimal role to play in determining corporate
overinvestment in the low growth period. Further tests show that the difference between the coefficients of overconfidence in
Columns (2) and (5) is statistically significant with a p-value of 0.009, and the p-value of the difference between the coefficients for the interaction terms in Columns (3) and (6) is 0.004. Hence, as Hypothesis 5 predicts, inflation uncertainty exhibits asymmetric influences on corporate investment over different economic cycles, and the influence of managerial
overconfidence is also economic regime dependent.
5. Robustness tests
To assess the sensitivity of our empirical results, we conduct a number of additional tests involving alternative methodologies, and alternative definitions/measurements of overconfidence, inflation uncertainty as well as overinvestment.
5.1. Regression results with alternative methodologies
As indicated in Section 4, LPM and logit model each has its own merits and undesirable properties, we thus use logit
model in this subsection to test the robustness of our results. The results of the logit regression are reported in Columns

64

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

Table 7
Regression results under alternative methodologies.
Logit
Over invest

(1)

Inflation uncertainty

0.361***
(10.16)

2SLS
(2)

Inflation uncertainty*Overconfidence

Constraint
Cash
Leverage
ROA
BM
Agency cost
Tangibility
Constant
Industry effect
Year and quarter effect
Cluster by firm
Observations
Pseudo R2/R-squared

(4)

(5)

1.353***
(9.66)

1.255***
(12.91)

1.405***
(4.83)

0.127***
(3.69)
0.018
(1.633)
0.152***
(2.84)
0.305***
(10.79)
3.025***
(14.59)
0.031***
(3.615)
0.103
(0.21)
0.079***
(11.57)
1.378***
(15.28)
Yes
Yes
Yes
54328
8.1%

0.017**
(2.09)
0.156***
(3.22)
0.007
(0.47)
0.0194
(0.18)
0.259***
(6.81)
3.052***
(9.24)
0.009
(0.669)
0.139
(0.20)
0.052***
(6.31)
1.542***
(6.31)
Yes
Yes
Yes
11087
10.6%

0.103**
(2.04)

Overconfidence

Sales

(3)

0.627***
(4.17)
0.0842*
(1.67)
0.531**
(2.14)
1.562***
(10.57)
14.09***
(13.47)
0.097**
(2.54)
0.319
(0.14)
0.399***
(11.52)
0.361**
(2.07)
Yes
Yes
Yes
54328
6.7%

0.723***
(3.35)
0.035
(0.49)
0.083
(0.17)
1.340***
(6.78)
14.30***
(8.36)
0.020
(0.34)
1.739
(0.52)
0.280***
(6.40)
0.507*
(1.81)
Yes
Yes
Yes
11087
8.6%

0.075**
(2.14)
0.747***
(3.44)
0.024
(0.32)
0.139
(0.28)
1.365***
(6.82)
14.14***
(8.16)
0.001
(0.02)
1.708
(0.50)
0.284***
(6.39)
0.711**
(2.30)
Yes
Yes
Yes
11087
9.2%

Notes: This table shows the main empirical results from Logit and 2SLS methodologies. Variable definitions are in Table 1. The dependent variable is Over
Invest. All the independent variables are lagged by one period. All regressions include year and quarter dummy and industry dummy. Robust t-statistics
adjusted for firm-level clustering are reported in parentheses.
*
Statistical significance at the 10% level.
**
Statistical significance at the 5% level.
***
Statistical significance at 1% level.

(1)(3) of Table 7, which are consistent with the results based upon LPM reported in Table 4. In fact, the t-statistics for Overconfidence and (Inflation uncertainty x Overconfidence) are higher than that in the LPM.
Next, since inflationary uncertainty may be endogenous depending on the Central Banks policy, in Columns (4)(5) of
Table 7 we address this issue by showing the results from a two-stage least squares (2SLS) model, in which U.S. M2 uncertainty (the conditional variance of the growth rate of U.S. M2 in a GARCH (1,1) model) lagged two periods is used as an
instrumental variable for inflation uncertainty. U.S. monetary policy has an international spill-over effect (Kim & Roubini,
2000; Kim, 2001; Miniane & Rogers, 2007). Especially, U.S. monetary policy shocks explain a large fraction of the variance
in the aggregate price level and real aggregate output in emerging markets (Mackowiak, 2007). Chinese monetary policy
may be affected by the U.S. monetary policy, but at the same time the U.S. monetary policy may not be a key factor
influencing the investment decisions of managers in Chinese firms. Therefore, the U.S. M2 monetary uncertainty may serve
as a valid instrumental variable. Again, the results are consistent with the earlier conclusions regarding inflation uncertainty
and the effect of managerial overconfidence presented in Sections 4.1 and 4.2. In an un-tabulated analysis, we also conduct
the estimations with logit and 2SLS for different subsamples (SOEs and non-SOEs, respectively) and subperiods (20032007
and 20082012, respectively) and the results are consistent with those reported in Tables 5 and 6.
5.2. Regression results with alternative measurements of overconfidence and inflation uncertainty
As robustness checks, we use alternative measurements of overconfidence and inflation uncertainty to repeat the main
regressions. First, we use the GDP deflator to substitute for CPI and compute the conditional variance of the growth rate
of GDP deflator in a GARCH(1,1) model as the alternative proxy of inflation uncertainty. The annual GDP deflator is retrieved
from EIU Country Data and switched into quarterly frequency with quadratic-match averages. The results shown in Columns
(1)(2) of Panel A in Table 8 are consistent with previously reported.
To ensure the robustness of using different measures of managerial overconfidence, we also compare the net profit forecast by firms with that by analysts, as managers have the incentive of earnings management (Goodman, Neamtiu, Shroff, &
White, 2014; Hilary, Hsu, & Wang, 2014). Then we set Overconfidence2 equal to 1 if the mean of firms forecast is larger

65

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469
Table 8
Regression results with alternative measurements for inflation uncertainty and overconfidence.
Panel A
Quarterly/GDP deflator

Yearly/Overconfidence2

Over invest

(1)

(2)

(3)

Inflation uncertainty

0.018***
(3.03)

0.052**
(2.49)

0.011**
(2.29)

(4)

***

Overconfidence
Inflation uncertainty*Overconfidence
***

Sales
Constraint
Cash
Leverage
ROA
BM
Agency cost
Tangibility
Constant
Industry effect
Year (and Quarter) Effect
Cluster by firm
Observations
R-squared

0.124
(3.64)
0.017
(1.55)
0.155***
(2.89)
0.306***
(10.81)
2.917***
(14.09)
0.025***
(2.93)
0.302
(0.62)
0.080***
(11.61)
0.358***
(9.39)
Yes
Yes
Yes
54328
7.9%

(5)

0.107
(2.74)

0.030***
(2.59)
0.150***
(3.08)
0.01
0.65
0.027
(0.25)
0.259***
(6.83)
2.894***
(8.81)
0.002
(0.12)
0.067
(0.10)
0.052***
(6.30)
0.425***
(7.05)
Yes
Yes
Yes
11087
10.5%

**

0.025
(2.08)
0.107***
(8.78)
0.042
(1.20)
1.124***
(5.03)
0.084
(0.31)
0.067***
(3.12)
1.341***
(7.14)
0.528***
(16.39)
0.464***
(8.87)
Yes
Yes
Yes
14901
6.6%

0.018
(0.51)
0.138***
(3.09)
0.049
(0.50)
0.219
(0.38)
0.916
(1.29)
0.071
(0.85)
2.154***
(4.14)
0.586***
(5.94)
0.591**
(2.41)
Yes
Yes
Yes
1452
6.6%

0.129*
(1.75)
0.027**
(2.44)
0.017
(0.49)
0.136***
(3.05)
0.049
(0.50)
0.226
(0.39)
0.923
(1.30)
0.074
(0.89)
2.148***
(4.12)
0.587***
(5.93)
1.040***
(3.73)
Yes
Yes
Yes
1452
6.5%

Panel B
Full sample
Over invest

(1)

Inflation uncertainty
Overconfidence3
*

0.035**
(2.55)

Inflation uncertainty Overconfidence3

Sales
Constraint
Cash
Leverage
BM
ROA
Agency cost
Tangibility
Constant
Industry effect
Year and quarter effect
Cluster by firm
Observations
R-squared

0.122***
(3.51)
0.019
(1.64)
0.172***
(3.14)
0.307***
(10.6)
0.024***
(2.80)
2.907***
(13.81)
0.426
(0.86)
0.080***
(11.45)
0.320***
(8.39)
Yes
Yes
Yes
51038
8.8%

After 2006
(2)

(3)

0.032***
(4.03)
***

0.031
(3.39)
0.122***
(3.51)
0.019
(1.63)
0.172***
(3.14)
0.307***
(10.6)
0.024***
(2.80)
2.908***
(13.81)
0.415
(0.84)
0.080***
(11.46)
0.347***
(8.92)
Yes
Yes
Yes
51038
8.8%

0.059***
(3.37)
0.092**
(2.38)
0.012
(0.97)
0.180***
(2.86)
0.303***
(9.05)
0.041**
(2.14)
2.383***
(10.19)
0.264
(0.44)
0.077***
(9.61)
0.413***
(9.26)
Yes
Yes
Yes
35781
8.4%

(4)
0.086***
(7.86)
0.040***
(3.69)
0.092**
(2.40)
0.013
(1.02)
0.182***
(2.89)
0.304***
(9.08)
0.045**
(2.35)
2.389***
(10.21)
0.300
(0.51)
0.077***
(9.63)
0.487***
(10.64)
Yes
Yes
Yes
35781
8.5%

Notes: This table reports the results with alternative measurements of inflation uncertainty and overconfidence. Variable definitions are in Table 1. The
alternative measurements for overconfidence are Overconfidence2 and Overconfidence3, while the measurement for inflation uncertainty is GDP
deflator. Overconfidence2 is a dummy variable, indicating whether the firms forecast is larger than that of the analysts forecast. Overconfidence3 is a
dummy variable, indicating whether managers increase holding of the shares of their firms. In Panel A, Columns (1)(2) are the results when GDP deflator is
the proxy for inflation uncertainty. Columns (3)(5) are the results using Overconfidence2 and yearly data. In Panel B, Columns (1)(2) and (3)(4) represent
the results with Overconfidence3 for the full sample and the sample after 2006 (not including 2006), respectively. All the independent variables are lagged by
one period. All regressions include year and quarter dummy and industry dummy. Robust t-statistics adjusted for firm-level clustering are reported in
parentheses.
*
Statistical significance at the 10% level.
**
Statistical significance at the 5% level.
***
Statistical significance at 1% level.

66

Full Sample
Over Invest2

(1)

Inflation uncertainty

0.073***
(9.71)

SOEs
(2)

Overconfidence
*

0.019*
(1.68)

Inflation uncertainty Overconfidence

Sales
Constraint
Cash
Leverage
BM
ROA
Agency cost
Tangibility
Constant
Industry Effect
Year and Quarter Effect
Cluster by firm
Observations
R-squared

***

0.104
(3.12)
0.016
(1.41)
0.079
(1.51)
0.290***
(10.37)
0.0164**
(1.97)
2.727***
(13.31)
0.254
(0.54)
0.079***
(11.64)
0.372***
(9.97)
Yes
Yes
Yes
56034
7.4%

***

0.138
(2.88)
0.005
(0.33)
0.001
(0.01)
0.255***
(6.81)
0.006
(0.44)
2.607***
(8.01)
0.576
(0.81)
0.051***
(6.23)
0.390***
(6.87)
Yes
Yes
Yes
11172
9.8%

non-SOEs

(3)

(4)

(5)

0.292***
(9.79)

0.025***
(2.74)

0.015
(1.89)
0.141***
(2.95)
0.003
(0.19)
0.009
(0.01)
0.258***
(6.87)
0.003
(0.20)
2.531***
(7.74)
0.512
(0.72)
0.051***
(6.21)
0.653***
(10.33)
Yes
Yes
Yes
11172
10.5%

0.079
(1.84)
0.072***
(4.68)
0.250***
(3.58)
0.246***
(6.33)
0.020**
(2.24)
2.915***
(10.27)
0.445
(0.73)
0.095***
(11.72)
0.202***
(4.08)
Yes
Yes
Yes
31931
9.2%

0.042**
(2.47)

0.101
(1.46)
0.029
(1.23)
0.276*
(1.75)
0.252***
(4.52)
0.012
(0.81)
3.095***
(6.79)
0.870
(0.86)
0.063***
(6.21)
0.227***
(3.12)
Yes
Yes
Yes
4758
11.5%

(6)

(7)

0.052
(1.26)

0.098***
(7.06)

(9)

(10)

0.327***
(7.47)

0.006
(0.53)

**

0.124
(2.33)
0.019
(1.02)
0.062
(0.78)
0.275***
(6.93)
0.024
(1.39)
2.166***
(7.60)
0.543
(0.75)
0.043***
(3.90)
0.499***
(8.12)
Yes
Yes
Yes
20952
8.3%

**

0.161
(2.29)
0.017
(0.66)
0.120
(0.81)
0.236***
(4.31)
0.006
(0.19)
1.958***
(4.06)
1.148
(1.14)
0.035**
(2.46)
0.438***
(4.20)
Yes
Yes
Yes
5560
9.7%

0.007
(0.61)
0.166**
(2.36)
0.014
(0.53)
0.146
(0.97)
0.248***
(4.50)
0.020
(0.64)
1.812***
(3.75)
1.006
(0.10)
0.035**
(2.46)
0.738***
(6.47)
Yes
Yes
Yes
5560
10.5%

20082012
(11)

0.010
(0.63)

**

0.029
(2.50)
0.102
(1.48)
0.030
(1.26)
0.276*
(1.75)
0.253***
(4.52)
0.011
(0.77)
3.085***
(6.77)
0.856
(0.84)
0.063***
(6.19)
0.275***
(3.40)
Yes
Yes
Yes
4758
11.5%

20032007
(8)

***

0.165
(3.71)
0.042***
(2.61)
0.095
(1.23)
0.254***
(6.44)
0.017**
(2.03)
3.944***
(12.85)
1.948***
(3.23)
0.077***
(8.32)
0.202***
(4.26)
Yes
Yes
Yes
21604
9.7%

0.063***
(2.86)
***

0.226
(3.22)
0.031
(1.30)
0.352**
(2.02)
0.294***
(5.49)
0.006
(0.38)
3.315***
(7.45)
2.415**
(2.47)
0.042***
(3.81)
0.226***
(2.98)
Yes
Yes
Yes
3506
13.4%

(12)

(13)

0.021
(0.37)

0.226***
(20.41)

0.072***
(3.28)
0.224***
(3.19)
0.031
(1.28)
0.354**
(2.03)
0.293***
(5.47)
0.006
(0.40)
3.330***
(7.49)
2.389**
(2.44)
0.042***
(3.83)
0.210**
(2.39)
Yes
Yes
Yes
3506
13.5%

(14)

(15)
0.538***
(14.16)

0.006
(0.48)

0.045
(1.15)
0.001
(0.10)
0.108*
(1.71)
0.276***
(8.20)
0.010
(0.52)
2.311***
(9.62)
1.276**
(2.19)
0.077***
(9.22)
0.842***
(15.86)
Yes
Yes
Yes
34430
7.7%

0.053
(0.92)
0.036*
(1.75)
0.095
(0.73)
0.172***
(3.46)
0.091***
(2.70)
2.617***
(6.16)
1.596*
(1.74)
0.058***
(5.10)
0.434***
(6.11)
Yes
Yes
Yes
7666
8.8%

0.009
(1.11)
0.061
(1.05)
0.034*
(1.65)
0.098
(0.76)
0.180***
(3.63)
0.077**
(2.25)
2.481***
(5.81)
1.659*
(1.81)
0.060***
(5.21)
0.867***
(11.02)
Yes
Yes
Yes
7666
11.0%

Notes: The table reports the results with another measurement for investment efficiency when we estimate Eq. (1) with Tobins q instead of sales growth. Variable definitions are in Table 1. The dependent variable
is Over Invest2. All the independent variables are lagged by one period. All regressions include year and quarter dummy and industry dummy. Robust t-statistics adjusted for firm-level clustering are reported in
parentheses.
*
Statistical significance at the 10% level.
**
Statistical significance at the 5% level.
***
Statistical significance at 1% level.

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

Table 9
Regression results with alternative measurement for over-investment.

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

67

than the mean of analysts forecast. As the data on analysts forecast begin in 2005 and are of annual frequency, we repeat the
regression with yearly data. The consistent results in Columns (3)(5) of Panel A in Table 8 also alleviate potential concern
about quarterly data.
To be sure, we further construct another proxy for managerial overconfidence. Overconfidence may lead managers to
overestimate future returns of their investment projects. As a result, overconfidence induces them to postpone option exercise or to buy additional company stocks in order to benefit personally from the expected future gains. Malmendier and Tate
(2005, 2008) use the exercise of stock options to measure managerial overconfidence. In China employee stock options are
not prevalent, so we gauge managerial overconfidence by looking at whether managers increase their holding of their firms
stocks. A confident manager would increase his/her shareholding, while a less confident one would not. Therefore, we define
Overconfidence3 as a dummy, equaling to 1 if managers buy more stocks of their firms and 0 otherwise. Columns (1)(2) of
Panel B in Table 8 show the results. Considering that managers cannot sell their shares in China due to the regulation before
the Split Share Structure Reform, we also do the regression after 2006, when most firms have completed the Split Share
Structure Reform. The results are shown in Columns (3)(4) of Panel B. All the results are consistent with the baseline model
in Table 4.
When these findings are jointly taken into account, it appears that despite the fact that in times of inflation uncertainty
firms may restrain themselves from overinvesting, managerial overconfidence can lead firms to invest more than they otherwise would have. In an un-tabulated analysis, we also find consistent robustness test results with the logit model.

5.3. Regression results with alternative measurement of overinvestment

In this subsection, we use Tobins q instead of sales growth as the proxy for the investment opportunity and re-estimate
Eq. (1) to obtain regression residuals (Biddle et al., 2009). We define the new variable Over-Invest2 as a dummy that takes on
the value of 1 if the residual is positive; 0 otherwise. We then use Over-Invest2 as the alternative measurement for overinvestment and the relevant results are shown in Table 9. Columns (1)(3) are the results for the full sample. Columns (4)(6)
and (7)(9) are for SOEs and non-SOEs, respectively. Columns (10)(12) and (13)(15) are for 20032007 and 20082012,
respectively. Apparently, the results are similar to those reported in Tables 46. In an un-tabulated analysis, we also use both
sales growth and Tobins q to estimate the expected investment model (Eq. (1)) and find similar results.

6. Conclusions
We extend prior work on 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 publicly listed companies using quarterly financial statements from 2003 to 2012.
Overall, the empirical findings demonstrate that higher inflation uncertainty leads to less overinvestment, while managerial overconfidence lightens such negative effect. Put in a different way, our findings show that lower inflation uncertainty
increases overinvestment, and managerial overconfidence exacerbates such effect.
Further analysis on the SOEs and non-SOEs shows that overinvestment in SOEs is mainly driven by managerial overconfidence. The effect of managerial overconfidence, however, is mute in non-SOEs. This evidence illustrates the importance of
uncertainty stemming from macroeconomic conditions in affecting corporate investment efficiency and that managerial
overconfidence can exacerbate overinvestment in SOEs. In addition, we find asymmetric impact of inflation uncertainty
on corporate overinvestment during different economic cycles.
Our paper highlights the importance of macroeconomic environmental changes along with the existence of managerial
overconfidence in affecting corporate overinvestment. The policy implications of the results are at least twofold. First,
because the close relationship between inflation uncertainty and macroeconomic policy, in order to reduce the effect of inflation uncertainty on corporate investment behavior, we believe it is necessary to maintain a stable macroeconomic policy
environment. With macroeconomic stability, managers can form rational expectations, minimize any cognitive bias and
make sound investment decisions, thereby improving investment efficiency. Second, the finding on the greater likelihood
for SOEs to over-invest under an inflationary uncertain environment sheds insight on the important role of SOEs in the
Chinese economy and reveals their potential disadvantage (e.g., SOEs have higher agency cost than non-SOEs). Therefore,
the policy implications of this study suggest that imposing good corporate governance structures and maintaining a stable
macroeconomic environment are equally important in improving corporate investment efficiency.
Acknowledgements
Yizhong Wang is grateful for financial supports from the soft science project of Zhejiang province (2014C35033), Humanities and Social Sciences Key Research Base of major projects of the Ministry of Education of China (15JJD790031), the key
Research topics of Academy of Financial Research of Zhejiang University and Seed Funding Program for young teacher of
interdisciplinary research at Zhejiang University (2013). Ying Sophie Huang gratefully acknowledges the financial support
provided by the National Natural Science Foundation of China (Grant No. 71573228).

68

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

References
Ang, J. S., Cole, R. A., & Lin, J. W. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 81106. http://dx.doi.org/10.1111/00221082.00201.
Bassie, V. L. (1955). Recent Development in Short-term Forecasting : . Princeton University Press, pp. 752.
Baum, C. F., Chakraborty, A., & Liu, B. (2010). The impact of macroeconomic uncertainty on firms changes in financial leverage. International Journal of
Finance and Economics, 15(1), 2230. http://dx.doi.org/10.1002/ijfe.406.
Beaudry, P., Caglayan, M., & Schiantarelli, F. (2001). Monetary instability, the predictability of prices, and the allocation of investment: An empirical
investigation using U.K. panel data. The American Economic Review, 91(3), 648662. http://dx.doi.org/10.1257/aer.91.3.648.
Bernile, G., Bhagwat, V., & Rau, P. R. (in press). What doesnt kill you will only make you more risk-loving: Early-life disasters and CEO behavior. Journal of
Finance. http://dx.doi.org/10.1111/jofi.12432 (in press).
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2),
112131. http://dx.doi.org/10.1016/j.jacceco.2009.09.001.
Bo, H., & Zhang, Z. (2002). The impact of uncertainty on firm investment: Evidence from machinery industry in Liaoning province of China. Economic
Systems, 26(4), 335352. http://dx.doi.org/10.1016/S0939-3625(02)00058-4.
Bredin, D., & Fountas, S. (2009). Macroeconomic uncertainty and performance in the European Union. Journal of International Money & Finance, 28(6),
972986. http://dx.doi.org/10.1016/j.jimonfin.2008.09.003.
Broer, T. & Kero, A. (2012). Great moderation or great mistake: Can rising confidence in low macro-risk explain the boom in asset prices? CEPR Discussion
Paper, No. DP8700.
Byrne, J. P., & Davis, E. P. (2004). Permanent and temporary inflation uncertainty and investment in the United States. Economics Letters, 85(2), 271277.
http://dx.doi.org/10.1016/j.econlet.2004.04.015.
Camerer, C., & Lovallo, D. (1999). Overconfidence and excess entry: An experimental approach. The American Economic Review, 89(1), 306318. http://dx.doi.
org/10.1257/aer.89.1.306.
Cavallo, E., Galindo, A., Izquierdo, A., & Len, J. J. (2013). The role of relative price volatility in the efficiency of investment allocation. Journal of International
Money & Finance, 33(4682), 118. http://dx.doi.org/10.1016/j.jimonfin.2012.10.003.
Chen, G., Firth, M., & Rui, O. (2006). Have Chinas enterprise reforms led to improved efficiency and profitability? Emerging Markets Review, 7(1), 82109.
http://dx.doi.org/10.1016/j.ememar.2005.05.003.
Chen, G., Firth, M., & Xu, L. (2009). Does the type of ownership control matter? Evidence from chinas listed companies. Journal of Banking and Finance, 33(1),
171181. http://dx.doi.org/10.1016/j.jbankfin.2007.12.023.
Chen, Y., Li, T., Shi, Y., & Zhou, Y. (2014). Welfare costs of inflation: Evidence from China. Social Indicators Research, 119(3), 11951218. http://dx.doi.org/
10.1007/s11205-013-0553-y.
Chen, I. J., & Lin, S. H. (2012). Will managerial optimism affect the investment efficiency of a firm? Procedia Economics & Finance, 2(12), 7380. http://dx.doi.
org/10.1016/S2212-5671(12)00066-4.
_
Cizkowicz,
P., Hoda, M., & Rzonca, A. (2010). Inflation and corporate investment a critical survey. Bank I Kredyt, 41(6), 544.
Claessens, C. A. M. F., Tong, H., & Wei, S. (2012). From the financial crisis to the real economy: Using firm-level data to identify transmission channels. Journal
of International Economics, 88(2), 375387. http://dx.doi.org/10.1016/j.jinteco.2012.02.015.
Cooper, A. C., Woo, C. Y., & Dunkelberg, W. C. (1988). Entrepreneurs perceived chances for success. Journal of Business Venturing, 3(2), 97108. http://dx.doi.
org/10.1016/0883-9026(88)90020-1.
De Gregorio, J. (1993). Inflation, taxation, and long-run growth. Journal of Monetary Economics, 31(3), 271298. http://dx.doi.org/10.1016/0304-3932(93)
90049-L.
Duchin, R., Ozbas, O., & Sensoy, B. A. (2010). Costly external finance, corporate investment, and the subprime mortgage credit crisis. Journal of Financial
Economics, 97(3), 418435. http://dx.doi.org/10.1016/j.jfineco.2009.12.008.
Fischer, G. (2013). Investment choice and inflation uncertainty. Unpublished results. Lse Research Online Documents on Economics.
Friedman, M. (1963). Inflation: Causes and Consequences : . Asia Publishing House.
Friedman, M. (1977). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85(3), 451472. http://dx.doi.org/10.1086/260579.
Gomariz, M., & Ballesta, J. (2014). Financial reporting quality, debt maturity and investment efficiency. Journal of Banking & Finance, 40(1), 494506. http://
dx.doi.org/10.1016/j.jbankfin.2013.07.013.
Goodman, T., Neamtiu, M., Shroff, N., & White, H. (2014). Management forecast quality and capital investment decisions. Accounting Review, 89(1), 331365.
http://dx.doi.org/10.2308/accr-50575.
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. Review of Financial Studies, 29(3), 523564. http://dx.doi.org/10.1093/rfs/hhv050.
Guo, F., & Huang, Y. S. (2010). Does hot money drive chinas real estate and stock markets? International Review of Economics and Finance, 19(3), 452466.
http://dx.doi.org/10.1016/j.iref.2009.10.014.
Hadlock, C. J., & Pierce, J. R. (2010). New evidence on measuring financial constraints: Moving beyond the KZ index. The Review of Financial Studies, 23(5),
19091940. http://dx.doi.org/10.1093/rfs/hhq009.
Heaton, J. B. (2002). Managerial optimism and corporate finance. Financial Management, 31(2), 3345. http://dx.doi.org/10.2307/3666221.
Hilary, G., Hsu, C., & Wang, R. (2014). Management forecast consistency. Journal of Accounting Research, 52(1), 163191. http://dx.doi.org/10.1111/1475679X.12033.
Hmieleski, K. M., & Baron, R. A. (2008). When does entrepreneurial self-efficacy enhance versus reduce firm performance? Strategic Entrepreneurship Journal,
2(1), 5772. http://dx.doi.org/10.1002/sej.42.
Hribar, P., & Yang, H. (2016). CEO overconfidence and management forecasting. Contemporary Accounting Research, 33(1), 204227. http://dx.doi.org/
10.1111/1911-3846.12144.
Huang, W., Jiang, F., Liu, Z., & Zhang, M. (2011). Agency cost, top executives overconfidence, and investment-cash flow sensitivity evidence from listed
companies in china. Pacific-Basin Finance Journal, 19(3), 261277. http://dx.doi.org/10.1016/j.pacfin.2010.12.001.
Hwang, J., & Wu, M. (2011). Inflation and economic growth in china: an empirical analysis. China and World Economy, 19(5), 6784. http://dx.doi.org/
10.1111/j.1749-124X.2011.01259.x 19, 67-84.
Johnson, D. D. P., & Fowler, J. H. (2011). The evolution of overconfidence. Nature, 477(7364), 317320. http://dx.doi.org/10.1038/nature10384.
Kaniel, R., Massey, C., & Robinson, D. T. (2010). Optimism and economic crisis Unpublished results : . Duke University.
Kim, S. (2001). International transmission of U.S. monetary policy shocks: Evidence from VARs. Journal of Monetary Economics, 48(2), 339372. http://dx.doi.
org/10.1016/S0304-3932(01)00080-0.
Kim, S., & Roubini, N. (2000). Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach. Journal of Monetary Economics,
45(3), 561586. http://dx.doi.org/10.1016/S0304-3932(00)00010-6.
Klayman, J., Soll, J. B., Gonzlez-Vallejo, C., & Barlas, S. (1999). Overconfidence: It depends on how, what, and whom you ask. Organizational Behavior and
Human Decision Processes, 79(3), 216247. http://dx.doi.org/10.1006/obhd.1999.2847.
Libby, R., & Rennekamp, K. (2012). Self-serving attribution bias, overconfidence, and the issuance of management forecasts: Overconfidence and forecast
issuance. Journal of Accounting Research, 50(1), 197231. http://dx.doi.org/10.1111/j.1475-679X.2011.00430.x.
Lin, Y., Hu, S., & Chen, M. (2005). Managerial optimism and corporate investment: Some empirical evidence from Taiwan. Pacific-Basin Finance Journal, 13(5),
523546. http://dx.doi.org/10.1016/j.pacfin.2004.12.003.
Mackowiak, B. (2007). External shocks, U.S. monetary policy and macroeconomic fluctuations in emerging markets. Journal of Monetary Economics, 54(8),
25122520. http://dx.doi.org/10.1016/j.jmoneco.2007.06.021.

Y. Wang et al. / North American Journal of Economics and Finance 38 (2016) 5469

69

Malmendier, U., & Nagel, S. (2011). Depression babies: Do macroeconomic experiences affect risk taking? The Quarterly Journal of Economics, 126(1),
373416. http://dx.doi.org/10.1093/qje/qjq004.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 26612700. http://dx.doi.org/10.1111/j.15406261.2005.00813.x.
Malmendier, U., & Tate, G. (2008). Who makes acquisitions? CEO overconfidence and the markets reaction. Journal of Financial Economics, 89(1), 2043.
http://dx.doi.org/10.1016/j.jfineco.2007.07.002.
Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and early-life experiences: The effect of managerial traits on corporate financial policies. The
Journal of Finance, 66(5), 16871733. http://dx.doi.org/10.1111/j.1540-6261.2011.01685.x.
March, J. G., & Shapira, Z. (1987). Managerial perspectives on risk and risk taking. Management Science, 33(11), 14041418. http://dx.doi.org/10.1287/
mnsc.33.11.1404.
Miniane, J., & Rogers, J. H. (2007). Capital controls and the international transmission of U.S. money shocks. Journal of Money, Credit and Banking, 39(5),
10031035. http://dx.doi.org/10.1111/j.1538-4616.2007.00056.x.
Nofsinger, J. R. (2005). Social mood and financial economics. Journal of Behavioral Finance, 6(3), 144160. http://dx.doi.org/10.1207/s15427579jpfm0603_4.
Poensgen, O., & Straub, H. (1976). Inflation and the corporate investment decision. Management International Review, 16(4), 1333.
Qi, D., Wu, W., & Zhang, H. (2000). Shareholding structure and corporate performance of partially privatized firms: Evidence from listed Chinese companies.
Pacific-Basin Finance Journal, 8(5), 587610. http://dx.doi.org/10.1016/S0927-538X(00)00013-5.
Reagan, P., & Stulz, R. M. (1993). Contracting costs, inflation, and relative price variability. Journal of Money, Credit and Banking, 25(3), 585601. http://dx.doi.
org/10.2307/2077726.
Russo, J., & Schoemaker, P. (1992). Managing overconfidence. Sloan Management Review, 33(2), 717.
Schoar, A., & Zuo, L. (2011). Shaped by booms and busts: how the economy impacts CEO careers and management styles. NBER Working Paper No. 17590.
Shields, K., Olekalns, N., Henry, . T., & Brooks, C. (2005). Measuring the response of macroeconomic uncertainty to shocks. The Review of Economics and
Statistics, 87(2), 362370. http://dx.doi.org/10.1162/0034653053970276.
Summers, L. (1981). Inflation, taxation, and corporate investment: A q-theory approach. Brookings Papers on Economic Activity, 1, 67127.
Talavera, O., Tsapin, A., & Zholud, O. (2012). Macroeconomic uncertainty and bank lending: The case of Ukraine. Economic Systems, 36(2), 279293. http://dx.
doi.org/10.1016/j.ecosys.2011.06.005.
Tong, H., & Wei, S. (2011). The composition matters: Capital inflows and liquidity crunch during a global economic crisis. The Review of Financial Studies, 24
(6), 20232052. http://dx.doi.org/10.1093/rfs/hhq078.
Wang, X., Zhang, M., & Yu, F. (2009). Managerial overconfidence and over-investment: Empirical evidence from china. Frontiers of Business Research in China,
3(3), 453469. http://dx.doi.org/10.1007/s11782-009-0022-2.
Yoon, K. H., & Ratti, R. A. (2011). Energy price uncertainty, energy intensity and firm investment. Energy Economics, 33(1), 6778. http://dx.doi.org/10.1016/j.
eneco.2010.04.011.