The Impact of Managerial Overconfidence on Systematic and Unsystematic Risk

Overconfidence is one of the most important concepts in modern financial behavior which leads individuals to overestimate their knowledge and skills. This makes the prediction of phenomenon too extreme. Overconfidence can affect corporate investment, financing, and dividend policies. The aim of the present study is to investigate the effect of managerial over confidence on systematic and unsystematic risk. For this purpose 120 companies that were accepted at the Tehran Stock Exchange during the period of 2005 to 2015 were studied. In order to measure the managerial overconfidence the model of Biddle, Hilary & Verdi (2008) based on over investment was exploited. Beta is reagent of systematic risk. In order to measure the unsystematic risk, standard deviation of the residual of CAPM was exploited. The findings shows that there exist a significant positive relationship between managerial overconfidence and systematic and unsystematic risk. In the other words, managerial overconfidence increases systematic and unsystematic risk.