Abstract
Research background: Overconfidence is one of the biases and fallacies that affect a cognitive process. Indeed, overconfidence has some serious consequences even in corporate finance. The literature is not consistent as for the impact of overconfidence on investment and financing decisions. Additionally, we include the issue of financial constraints to our analysis as investment-cash flow sensitivity (ICFS) is perceived as the measure of financial constraints.
 Purpose of the article: The aim of this paper is to test investment-cash flow sensitivity and financial constraints under managerial overconfidence. We think that companies managed by overconfident managers show a higher relation between cash flows and investment and demonstrate bigger financial constraints.
 Methods: In this paper, we test investment-cash flow sensitivity and financial constraints under CEO overconfidence among panel data of Polish private firms. We collect the unique sample of 145 non-listed companies by surveying the CEOs on their overconfidence. We collect the financial data of surveyed companies covering the 2010?2016 period. Total number of observations is 1015.
 Findings & Value added: First, we find a positive and higher relation between the investment-cash flow sensitivity for companies managed by overconfident managers which is in line with recent research. As for the financial constraints we find lower level of financial constraints among the companies managed by overconfident man-agers. This might be evidence that despite having lower financial constraints the companies managed by overconfident managers intentionally choose internal funds as the main source of financing and refrain from using external funds. To the best of our knowledge, this paper is the first empirical study for Polish companies on the relation between CEO overconfidence and financial decisions.
Highlights
Overconfidence is one of the biases and fallacies which affect cognitive processes and which can have some serious consequences
Findings & Value added: First, we find a positive and higher relation between the investmentcash flow sensitivity for companies managed by overconfident managers which is in line with recent research
Because we find contradictory indications on the basis of investment-cash flow sensitivity (ICFS) and financial constraints indexes, we cannot confirm that investment — cash flow sensitivity is a good measure of financial constraints, and in this way our findings are in line of those opposing to the concerning ICS as the measure of financial constraints (Kaplan & Zingales, 1997; Cleary, 1999; Chen & Chen, 2012; Gomes, 2001; Gatchev et al, 2010)
Summary
Overconfidence is one of the biases and fallacies which affect cognitive processes and which can have some serious consequences. Overconfident managers find it difficult to learn from past experience and correct their behavior (Heaton, 2002) They attribute all success to their own endeavors and at the same time they attribute any failure to the activity of others. Overconfident managers are convinced that their prospects are superior to others, they overestimate the possibility of success and, at the same time, they underestimate the possibility of failure. They think that the market undervalues the prospects of the companies they run (Malmendier & Tate, 2005)
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