An Investigation into the Effect of CEO’s Perceptual Biases on Investment Efficiency and Financing Constraints of the Iranian Listed Firms

Efficient market hypothesis predicts that capital markets are beset with certain biases which result from wrong estimation, and negatively influence shareholders’ expectations for higher returns, which in turn affects investment efficiency, financial constraints and corporate performance efficacy in competitive markets, and eventually mitigates firm value. The present study aims at examining the impact of CEOs’ perceptual biases on investment efficiency and financing constraints of the firms listed on the Tehran Stock Exchange over the period 2013-2017. Earnings forecast error and CEOs’ overconfidence biases serve as the measure of CEO’s perceptual biases, the model developed by Biddle et al [42] is employed to proxy for investment efficiency, and KZ model is also adopted to calculate financing constraints. The results reveal that both earnings forecast error and overconfidence biases negatively affect investment efficiency, while they positively influence corporate financing constraints. These results indicate that CEO’s perceptual biases creates a constraint on financing, and, on the other hand, reduces the efficiency of corporate investments. Under these conditions, the trust and confidence of investors and shareholders in relation to the company will be reduced, and the company will face negative features like the risk of a financial crisis.