Managerial Overconfidence, Corporate Financial Decisions and Firm Performance: Evidence from Non-Financial Firms Listed on the Pakistan Stock Exchange.

Tanvir  Sajid; Muhammad Zia ur  Rehman; Masroor Shah

doi:10.62270/jirms.v7i3.167

Authors

Tanvir Sajid Assistant Professor, Faisalabad Business School, National Textile University, Faisalabad. https://orcid.org/0009-0002-6097-2082
Muhammad Zia ur Rehman Associate Professor, Faisalabad Business School, National Textile University, Faisalabad. https://orcid.org/0000-0003-3770-5883
Masroor Shah PhD Scholar, Faculty of Management Sciences (FMS), International Islamic University (IIU), Islamabad, Pakistan. https://orcid.org/0009-0000-9562-2723

DOI:

https://doi.org/10.62270/jirms.v7i3.167

Keywords:

Managerial overconfidence, CEO overconfidence, Capital structure, Dividend policy, Investment decisions, Hedging decisions, Firm performance, Pakistan Stock Exchange

Abstract

Purpose— This study examines whether managerial (CEO) overconfidence, proxied by observable corporate behaviour, is associated with investment, financing, dividend, and hedging decisions and with firm performance in non-financial firms listed on the Pakistan Stock Exchange (PSX). Hedging is analysed separately from financing because it is a risk-management decision, not a capital-structure choice.

Study Design/methodology/approach—A balanced panel of 267 non-financial firms over 2016–2025 (2,670 firm-years) is estimated in EViews using panel regressions for continuous outcomes and a binary-choice model for hedging (use of derivatives). Because CEO-level psychometric and option-exercise data are unavailable for PSX firms, overconfidence is proxied by five archival firm-level indicators classified against industry benchmarks: over-financing, over-investment, research and development (R&D) and advertising intensity, capital expenditure, and CEO ownership. Results are read as associations consistent with the bias, not as direct measures of it.

Findings—The associations are selective and proxy-specific. Firms with above-industry debt show higher leverage but lower ROA, ROE, and Tobin’s Q; firms with above-industry capital expenditure show higher investment, ROA, ROE, and Tobin’s Q. Dividend decisions show no significant association with any proxy. Only CEO ownership is significant for hedging, with the opposite sign to that predicted.

Practical Implications—Boards should review debt-financed capital expenditure more closely, and the Securities and Exchange Commission of Pakistan (SECP) and the PSX should require fuller disclosure of derivative use, including instrument type.

Originality/Value—The study tests four corporate decisions and three performance measures in one framework on a ten-year archival panel, including the rarely studied hedging decision, and offers an archival, firm-level approach where CEO-level behavioural data are unavailable.

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