Career Experiences, Managerial Overconfidence and Investment Efficiency: A Natural Experiment from Chinese CEO Growth Path

Abstract

We show that managerial career experiences have significant explanatory power for corporate investment decisions. We use the setting of economic conditions changed from Central Planning to Market Economy, which is an exogenous shock to managerial characteristic, as a natural experiment to test the impact on corporate investment. To establish causality, we use a unique dataset from China and identify two extraordinary events of China that are likely to be formative experiences of CEOs early in life: growth after the Reform and Open-up era and original-and-persistent in business circles. Through these experiences, managerial characteristics can be formed and lead to attitude changes in investment activity. Chinese Reform and Open-up policy initiate a unique experiment environment in which corporatization and entrepreneur growth are synchronous from a new beginning. First, we document that RO-CEOs who experienced the Reform and Open-up in early adulthood tend to have higher likelihood of overinvestment and more confidence than CP-CEOs who were grow-up in central planning era experienced economic shocks and recessions. Second, OP-CEOs who are original and persistent in business circle choose more aggressive capital investments and more confidence than PB-CEOs who have long-term public administration experience before acting as executive. Furthermore, OP-CEOs and RO-CEOs are overconfident relative to PB-CEOs and CP-CEOs, respectively, and have more likelihood of underinvestment in financial constraint firms.