Managerial Overconfidence, Internal Financing, and Corporate Governance as Determinants of Investment Efficiency: Evidence from Indonesian Family Firms

Abstract

This study investigates the impact of managerial overconfidence, internal financing, and corporate governance on investment efficiency in Indonesian family-owned firms. Using panel data from 153 non-financial family firms listed on the Indonesia Stock Exchange between 2009 and 2018 (1,482 firm-year observations), investment efficiency is estimated using the residual-investment model, with managerial overconfidence proxied by chief executive officer characteristics (education, experience, gender, and performance) and corporate governance captured through boardroom characteristics. Data are analyzed using common, fixed, and random effects panel regressions, with the Driscoll-Kraay estimator applied where heteroskedasticity is detected. The results show that managerial overconfidence is positively associated with the use of internal financing, which in turn improves investment efficiency. However, managerial overconfidence has no significant direct effect on investment efficiency; internal financing instead moderates rather than mediates this relationship, and corporate governance is negatively associated with investment efficiency. These findings suggest that overconfident managers’ preference for internal funds can mitigate, rather than worsen, investment inefficiency in family-controlled firms, offering implications for board oversight and financing-policy design in emerging-market family firms.