Investigating the Role of Ownership Structure in the Relationship between Managers' Overconfidence and R&D ‎Expenditures in Terms of Financial Constraints

Overconfidence as one of the personality traits of managers affects each of the factors and stages of investment. In this regard, it is possible that financial constraints and ownership type affect the relationships. Hence, the purpose of this study was to investigate the roles of governmental ownership and managerial ownership in the relationship between managers' overconfidence and R&D expenses in the context of financial constraints. In this study, 30 companies were selected from among the companies listed on Tehran Stock Exchange (TSE) during the years of 2002-2018 to test the hypotheses by using the generalized least-squares method. The results indicated a significant and positive relationship between the managers' overconfidence and R&D expenses. This relationship was stronger in the companies with strong financing constraints. IntroductionDecisions of investing in R&D need more courage. Managers with extreme self-confidence are more entrepreneurial than rational managers, thus greatly promoting the company’s internal technological innovation activities. Some researchers believe that with the increase of uncertainty, the corporate investment environment will be more complicated and changeable, but overconfident managers are more interested in arduous tasks. Managers face more severe challenges in the R&D investment in the environment of strong compared to weak financing constraints. Therefore, using more confident managers to play an active role in innovation and compete with similar companies can be effective.On the other hand, the state- compared to non-state-owned companies can have access to internal and external financial resources more easily. This is because the state-owned companies have abundant assets and rich government-related resources. Thus, in the context of strong financial constraints, the former companies can use some special financing channels to obtain financial support. On the other hand, managerial ownership helps to align managers and shareholders’ interests since it has an effective role in controlling managers' behaviors, while causing managers to avoid decisions that lead to over-investment. Accordingly, the purpose of this study was to investigate the relationship between managers' overconfidence and R&D expenses in companies with financial constraints influenced by the type of ownership.   Method and DataIn this study, 30 companies were selected from among the companies listed on Tehran Stock Exchange (TSE) during the years of 2002-2018 to test the research hypotheses by using the generalized least-squares method. FindingsThe results indicated a significant and positive relationship between the managers' overconfidence and R&D expenses. This relationship was stronger in the companies with strong financing constraints. Additionally, the positive relationship between the managers' overconfidence and R&D expenses was stronger in the non-state-owned companies, while managerial ownership had no significant effect on the relationship between them in the context of financial constraints. Conclusion and discussion Based on the findings, the positive relationship between the managers' overconfidence and R&D expenses was stronger in the companies with strong financing constraints. In addition, upon investigating the impact of ownership type on this relationship, the positive relationship between them was found to be stronger in the non-state-owned compared to the state-owned companies in the context of strong financing constraints. On the other hand, managerial ownership did not show a significant effect on the relationship between them in the companies with financial constraints. In fact, the moderating role of state ownership was more effective than managerial ownership because the relationship between the managers' overconfidence and R&D expenses was weaker in the state-owned companies under financial constraints.