TOP MANAGEMENT TEAM CHARACTERISTICS, OVERCONFIDENCE, AND FINANCIAL ASSET ALLOCATION

This study examines how the heterogeneous characteristics of top management teams (TMTs) influence a firm’s decision to allocate resources to financial assets, a practice known as economic financialization. Moving beyond the traditional assumption of rational decision-making, the paper explores how individual differences among executives affect their psychological state—specifically overconfidence—and how that bias, in turn, drives or inhibits investment in financial assets.

Using a dataset of non-financial and non-real estate Chinese listed companies from 2008 to 2020, the author analyzes the impact of six key TMT characteristics: gender, age, tenure, education, financial experience, and overseas experience. The study differentiates between the homogeneity of these traits (e.g., average age or ratio of male executives) and their heterogeneity (diversity within the team). The research employs a mediation model and two-way fixed effects to determine if overconfidence acts as a transmission channel between these personal characteristics and the firm's financial asset density and growth.

The study reveals that TMT characteristics are significant predictors of financial asset allocation. In general, executives with longer tenures, higher levels of education, and more extensive financial or overseas experience tend to exhibit greater overconfidence, leading to more aggressive financial asset investments. Interestingly, while male-dominated teams show higher levels of overconfidence, gender heterogeneity serves as a check, often moderating these tendencies. The analysis suggests that while individual expertise can lead to more proactive investment, diversity within the TMT can help mitigate the risks associated with irrational exuberance by fostering diverse viewpoints and checking the overconfidence of dominant members.