Impact of Institutional Ownership on the Relationship between Managers` Overconfidence and Financial Leverage of the Companies Listed in the Tehran Stock Exchange

Document Type : Research Paper


1 Associate Prof.of Accounting, Management and Accounting collage, Allameh Tabataba’i

2 Prof., Department of Accounting, Faculty of Management & Accounting, Allameh Tabataba'i University, Tehran, Iran.

3 MSc., Department of Accounting, Faculty of Management & Accounting, Allameh Tabataba'i University, Tehran, Iran.


Objective: The capital structure and financing method and accordingly the factors affecting them are issues that have always been important for companies and stakeholders. The purpose of this paper is to investigate the impact of managers' overconfidence on corporate leverage and the moderating effect of institutional ownership on the relationship between managers' overconfidence and corporate leverage.
Methods: The study used a sample of 151 companies listed in the Tehran Stock Exchange for the period 2008-2017. In order to test the research hypotheses, multiple regression was used.
Results: The results show that the managers' overconfidence and institutional ownership have a positive and significant impact on the leverage. In addition, the evidence shows that institutional ownership has a negative and significant impact on the relationship between managers' overconfidence and corporate leverage.
Conclusion: Managers who are optimistic about the future of the company, while feeling that their stock will not be properly valued by the market due to their optimism, they will seek financing through borrowing when needed. Companies also have different potential opportunities for financing due to the composition of their capital structure. Some companies are more likely to attract more foreign resources than political firms with less size and credibility due to their political influence, their size and credibility. In addition, with the increase in institutional ownership due to their active oversight, manager decisions will be made to improve company performance and avoid decisions that compromise company performance.


Abdullah, S.N. (2004). Board composition, CEO duality and performance among Malaysian listed companies. Corporate Governance, 4 )4(, 47-61.
Accounting Standard Setting Committee (2017). Accounting Standards. Tehran, Audit Organization.(in Persian)
Almeida, H., Ferreira, D. & Adams, R.B. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 18 )4(, 1403-1432.
Anvari, A., Sadr, A., & Vadiee, M. (2014). Studying the Relationship between Corporate life Cycle and Stock Liquidity of Companies. Journal of Financial Management Strategy, 2(3), 1-25. (in Persian)
Boubaker, A., & Mezhoud, M. (2011). Impact of managerial ownership on operational performance of IPO firms: French context”, International Journal of Management Science and Engineering Management, 6 )3(. 191-197.
Brick, I.E., Palmon, O., & Wald, J.K. (2006). CEO compensation, director compensation and firm performance. Journal of Corporate Finance, 12 )3(, 403-423.
Chan, K.S., Dang, V.Q.T., & Yan, I.K.M. (2012). Chinese Firms’ Political Connection, Ownership, and Financing Constraints, Economics Letters, 115 (2), 164-167.
Chavoshi, K., Rastegar, M., & Mirzaee, M. (2015). Examination of the relation between Managerial Overconfidence and financing Policies in Tehran Stock Exchange. Financial Knowledge of Security Analysis (Financial Studies), 8 (25), 29-41.(in Persian)
Coles, J.L., Daniel, N.D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79) 2. (431-468.
Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region”, Journal of Multinational Financial Management, 14 )4(, 387-405.
Drobetz, W., Gruninger, M., & Hirschvogl, S. (2010). Information Asymmetry and the Value of Cash. Journal of Banking & Finance, 34 (9), 2168-2184.
Fairchild, R. (2009). Managerial overconfidence, moral hazard problems, and excessive life-cycle debt sensitivity. Investment Management and Financial Innovations, 6) 3(, 35-42.
Ferreira, M. A., & Vilela, A. (2004). Why Do Firms Hold Cash? Evidence from EMU Countries, European Financial Management, 10 (2), 295–319.
Hackbarth, D. (2008). Managerial traits and capital structure decisions, Journal of Financial and Quantitative Analysis, 43 (4), 843–882.
Hambrick, D.C. and Cannella, A. (2004). CEOs who have COOs: contigency analysis of an unexplored structural form. Strategic Management Journal, 25 )10(, 959-979.
Hasani Alghar, M., Rahimian, N (2018). The Effect of Managerial Overconfidence on Debt Maturity Structure in Listed Companies in Tehran Stock Exchange. Asset Management & Financing, 6 (1), 89-106.(in Persian)
Hilary, G., & Hsu, C. (2011). Endogenous overconfidence in managerial forecasts. Journal of Accounting and Economics, 51 )3(, 300-313.
Huang, G., & Song, F.M. (2006). The determinants of capital structure: evidence from China. China Economic Review, 17 (1), 14-36.
Ishikawa, M., & Takahashi, H. (2010). Overconfident Managers and External Financing Choice. Review of Behavioral Finance, 2 (1), 37–58.
Jani, E., Hoesli, M., & Bender, A. (2004). Corporate Cash Holdings and Agency Conflicts. available at,id=563863.
Kwanglim, S., Ellen Eun Kyoo, K., Amit, S. (2017). Examining the determinants of long-term debt in the US restaurant industry: Does CEO overconfidence affect debt maturity decisions? International Journal of Contemporary Hospitality Management, 29 (5), 1501-1520.
Li, K., Griffin, D., Yue, H., & Zhao, L. (2011). National culture and capital structure decisions: evidence from foreign joint ventures in China. Journal of International Business Studies, 42 )4(, 477-503.
Li, Z.L., Zhao, H.P. and Song, Y.F. (2009). Empirical research on managerial overconfidence and corporate financing behavior of pecking-order. IEEE 16th International Conference on Industrial Engineering and Engineering Management (IE&EM 2009), pp. 1496-1500.
Majluf, A. N., & Myers, E. B. (1984). Capital Structure and Firm Performance: A New a Proach to Testing Agency Ttheory and a Plication to the Banking Industry. Journal of Banking and Finance, (30), 1065-1102.
Malmendier, U., & Tate, G. (2005). CEO overconfidence and corporate investment. The Journal of Finance, 60 )6(, 2661-2700.
Mashayekh, S., Behzadpur, S. (2015). The effect of managers' overconfidence on dividend policy in the firms listed in Tehran stock market. Accounting and Auditing Review, 21 (4), 485-504. (in Persian)
Mehrani, S., Moradi, M., Eskandar, H., Hashemi, M. (2015). Institutional Ownership and Financial flexibility. The Financial Accounting and Auditing Research, 7 (28), 43-56.
(in Persian)
Nasiri, M., Bani Mahd, B., Ahmadzade, H. (2016). Managerial Overconfidence and Earnings Overstatement. Managemant Accounting, 9 (30), 55-65. (in Persian)
Nikbakht, M., Shaabanzadeh, M., Kalhor, K. (2015). Investigating the Effect of Managers' Overconfidence on Audit Fees in firms listed in Tehran Stock Exchange. Journal of Management and Accounting Studies, 2 (1), 171-189.(in Persian)
Nofsinger, J. (2003). Social mood and financial economics. The Journal of Behavioral Finance, 6(3), 144-160.
Opler T., Pinkowitz, L., Stulz, R., and R. Williamson (1999). The Determinants and Implications of Corporate Cash Holdings. Journal of Financial Economics, 52 (1), 3-46.
Presley, T., Abbott. L. (2013). AIA submission: CEO overconfidence and the incidence of financial restatement. Advances in Accounting, incorporating Advances in International Accounting, 29 (1), 74–84.
Rameshrh, R., Molanzari, M. (2014). Manageral Overconfidence and Accounting Conservatism. Journal of Accounting Knowledge5 (16), 55-79.(in Persian)
Razmjuei, P., Chahremani, A., Partov Nurollahi, S. (2015). The Impact of Ownership Structure on the Financing Methods of Companies Listed in Tehran Stock Exchange. International Conference on Research in Science and Technology, Tehran, Karine Research Institute.
Rechner, P.L., & Dalton, D.R. (1991). CEO duality and organizational performance: a longitudinal analysis. Strategic Management Journal, 12 )2(, 155-160.
Duellman, S., Hurwitz, H., & Sun, Y. (2015). Managerial overconfidence and audit fees. Journal of Contemporary Accounting & Economics11 (2), 148-165
Sheri, S., Rahmani, A., Bolu, C., Mohseni, B. (2015). Financial flexibility and the Financial leverage adjustment speed of companies listed in Tehran Stock Exchange (TSE). A Quarerly Journal of Empirical Research of Financial Accounting, 2 (2), 73-88. 
(in Persian)
Ting, I, Lean, H, Kweh, Q, Azizan, N. (2016). Managerial overconfidence, government intervention and corporate financing decision. International Journal of Managerial Finance, 12 (1), 4-24.
Wang, C.Y., Chen, Y.F., & Yu, C.W. (2013). Managerial optimism and post-financing stock performance in Taiwan: a comparison of debt and equity financing. Economics Letters, 119 )3(, 332-335.
Wei, J., Min, X., & Jiaxing, Y. (2011). Managerial overconfidence and debt maturity structure of firms: analysis based on China’s listed companies. China Finance Review International, 1 )3(, 262-279.