Abstract
Although managerial overconfidence is receiving substantial attention in economic analysis, explanations so far mostly focused on corporate executives and corporate investment and financing decisions. This study investigates SME managers (owners) overconfidence behavioral bias in working capital management and performance. A qualitative case study was employed to explore the perspectives of 35 SMEs managers from trading and manufacturing firms. Data were obtained through Semi- structured interviews. Based on the thematic analysis, the study found superior financial ability, perfect industry knowledge and optimism in business success to be SMEs overconfidence behaviors and their influence on working capital management and performance resulted in aggressive working capital investment and financing and expected higher performance. Specifically, overconfident SME managers is more likely to overinvest in working capital inventory for expected higher profits if they have access to sufficient internal capital. However, they are less likely to invest more in firms with substantial working capital investment in inventories if expected sales revenue are below expectation. We argued that, overconfident matters so it is not enough to study working capital management and performance of SMEs without considering manager’s biases.
Highlights
Working capital management has attracted scholars’ attention concerning how small and medium enterprises (SMEs) make working capital investment decisions to maximize profit
Given the fact that subjective decision is a typical case of behavioral bias, and noting that SMEs managers are the top executives, they are more likely exhibiting overconfident behavioral biases in working capital management and performance
Result Overconfident Behaviors of SME Managers We found SMEs managers to be overconfident which emerged from superior financial ability, complete perfect industry knowledge and optimism in business success
Summary
Working capital management has attracted scholars’ attention concerning how SME make working capital investment decisions to maximize profit. Given the fact that subjective decision is a typical case of behavioral bias, and noting that SMEs managers (owners) are the top executives, they are more likely exhibiting overconfident behavioral biases in working capital management and performance. Overconfidence research spans many disciplines and is one of the main managerial biases influencing corporate decision outcomes. Overconfident people unrealistically believe in their abilities, precision of knowledge and personal information to be better. This belief induces managers to overestimate firm value and underrate their failure. What is unclear yet is how overconfident SME managers influence working capital management and performance, despite that the fact overconfident people exist in every professional
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