CEO overconfidence, investment decisions and firm value in Indonesia

Abstract

This study examines the effect of CEO overconfident behaviour on investment decisions with a behavioural finance theory-based approach, then, examines the effect of investment decisions on firm value with a traditional finance theory approach. Managers who are overconfident are the cause of investment deviations, investment sensitivity, and overestimated project returns that actually affect the value of the company. This study uses 175 non-financial companies on the Indonesia Stock Exchange led by the same CEO during the 2015-2019 period. Data analysis in this study was carried out using the Partial Least Square (PLS) method. PLS is a method of solving structural equation modelling (SEM) which in this case (according to the research objectives) is more precise than other SEM techniques. The results showed that the CEO’s overconfident behaviour had a significant effect on firm value with investment decisions as a mediating variable. This means that the CEO’s overconfident behaviour is able to increase firm value through investment decisions as a mediating variable.