Does Internal Financing Trigger the relationship between Managerial Optimism and Investment Inefficiency?

Josephine Yau, Tan Hwang and Kong, Jiunn Wenn and Mubashir Ali, Khan and Audrey, Liwan and Azra, Tilai (2023) Does Internal Financing Trigger the relationship between Managerial Optimism and Investment Inefficiency? In: BORNEO BUSINESS RESEARCH CONFERENCE (BRRC 2023), 23 August 2023, Raia Hotel Convention Centre, Kuching.

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Abstract

This study investigates the relationship between managerial optimism and investment efficiency moderated by internal financing. The sample for this study comprises the FTSE 100 index firms listed on Bursa Malaysia from the year 2013 to 2018. In this study, the dependent variable is investment efficiency whereby its measurement is adopted from Biddle et al. (2009); the independent variable is managerial optimism which is proxied by net buyer, and lastly, the intermediate variable is internal financing whereby the method of measurement is adopted from He et al. (2019). The findings of this research portray that managerial optimism and internal financing have an insignificant relationship with investment efficiency when examined separately. However, the interaction term between managerial optimism and internal financing has a positive significant relationship with investment efficiency. This study shows that when internal finance is sufficient, the existence of managerial optimism tends to result in investment inefficiency (overinvestment) in the firm. It is important to acknowledge the existence of managerial optimism in the corporation, hence our study suggests that firms may refine their strategies by developing a mechanism that controls the internal financing of the firm as an approach to prevent the effects of managerial optimism leads to investment inefficiency.

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