Board Secretary S Financial Experience Overconfidence and SMEs Financing Preference Evidence From China S NEEQ Market

Journal of Small Business Management
ISSN: (Print) (Online) Journal homepage: www.tandfonline.com/journals/ujbm20
Board secretary’s financial experience,

overconfidence, and SMEs’ financing preference:
Evidence from China’s NEEQ market
Kun Wang, Yaozhi Chen, Yao Liu & Yingkai Tang
To cite this article: Kun Wang, Yaozhi Chen, Yao Liu & Yingkai Tang (2023) Board secretary’s
financial experience, overconfidence, and SMEs’ financing preference: Evidence from
China’s NEEQ market, Journal of Small Business Management, 61:4, 1378-1410, DOI:
10.1080/00472778.2020.1838177
To link to this article: https://doi.org/10.1080/00472778.2020.1838177
Published online: 20 Nov 2020.
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JOURNAL OF SMALL BUSINESS MANAGEMENT
2023, VOL. 61, NO. 4, 1378–1410
https://doi.org/10.1080/00472778.2020.1838177
Board secretary’s financial experience, overconfidence, and

SMEs’ financing preference: Evidence from China’s NEEQ
market
a,b b
Kun Wang , Yaozhi Chen , Yao Liub, and Yingkai Tanga,b
a
The Institute of Financial Studies, Sichuan University, P.R. China; bBusiness School, Sichuan
University, P.R. China
ABSTRACT KEYWORDS
This article explains the impact of the board secretary’s financial SMEs; board secretary;
experience on the financing preference from the perspectives of financing preference;
executive behavior and psychology. We use small and medium- financial experience;
sized enterprises (SMEs) listed on China’s National Equities overconfident
Exchange and Quotations (NEEQ) market as an empirical
research sample and confirm that SMEs who have board secre
taries with financial experience prefer external financing, thus
lowering the investment-cash flow sensitivity. Additionally, the
empirical conclusions are robust after changing the measure
ment of financing, expanding the scope of financial experience
definition, and removing state-owned SMEs from the sample for
robustness testing. We also control for the endogeneity using
a placebo test, PSM-DID, and instrumental variables. In further
research, we find that overconfident secretaries prefer external
financing; secretaries with financial experience can reduce infor
mation asymmetry to promote external financing, albeit mostly
short-term loans.
Introduction
In China’s multilevel capital market, the National Equities Exchange and
Quotations (NEEQ) market is a system that develops separately from the
Shanghai and Shenzhen Stock Exchanges. Unlike the large-scale enterprises
of the Shanghai and Shenzhen Stock Exchanges, the NEEQ market serves
mostly innovative, entrepreneurial, and growth SMEs. The NEEQ has
expanded nationwide since 2013, rapidly increasing the number of listings.
By the end of 2018, there were 10,644 companies listed on the NEEQ market,
94 percent of which were SMEs. Companies listed on the NEEQ can raise
funds through private placement, issuance of private debt, and equity pledges.
At the same time, NEEQ companies eligible for listing can be transferred
directly to the main board market. The NEEQ market plays the role of linking
the capital markets.
CONTACT Yingkai Tang [email protected] Business School, Sichuan University, No. 29, Wangjiang Road,
Wuhou District, Chengdu, Sichuan Province 610065, P.R. China.
© 2020 International Council for Small Business
JOURNAL OF SMALL BUSINESS MANAGEMENT 1379
However, the financing problem for companies on the NEEQ has not been
resolved. Since 2012, the number of listed companies that have obtained
financing through the issuance of new shares on the NEEQ has gradually
decreased, and the amounts raised have declined continuously. In 2018, the
scale of financing on the NEEQ was only 60.4 billion yuan. The number of
delisted companies reached 1,500 in the year. As of the beginning of 2018,
a total of 4,121 companies listed on the stock transfer system had had zero
stock issuance financing since their listing, accounting for 35.43 percent of all
listed companies. Based on foreign development experience and expectations,
the NEEQ should be the backbone of the future multilevel capital market;
however, presently, the NEEQ companies generally face the dilemma of
insufficient liquidity and inactive financing. Therefore, the financing of
SMEs on the NEEQ has come into focus for Chinese scholars.
Unlike in Europe and the United States, where the board secretary is
regarded as a corporate governance department parallel to the shareholders’
meeting, the board of directors, and the board of supervisors, Chinese
Company Law stipulates the board secretary as a senior manager of the
company. The law also states that the board secretary should “have more
than three years of work experience in financial, business administration or
law, etc.” to ensure that they supervise the standardized operation, assist in
company information disclosure, maintain communication with external
agencies, and coordinate the relationship between the company and investors
(Chen et al., 2016). This means that, compared with board secretaries in
Europe and the United States, Chinese laws and the Chinese market require
higher financial knowledge and market sensitivity of board secretaries.
Myers (1984) introduced information asymmetry to the capital structure
research in the article “The Mystery of Capital Structure” and thus proposed
a “New Pecking Order Theory,” which posits that companies’ first preference is
internal financing, followed by debt financing, and finally equity financing.
Because the “New Pecking Order Theory” negates the existence of an optimal
capital structure, many scholars conduct empirical research on the trade-off
theory and the “New Pecking Order Theory” (Fama & French, 2002; Frank &
Goyal, 2003; Shyam-Sunder & Myers, 1999). The “New Pecking Order Theory”
relies on two important hypotheses: the rational person hypothesis and informa
tion asymmetry. However, Heaton (2002) brought in the notion of irrational
behavior and proposed a new interpretation based on the psychological differ
ences of executives. He believed that the psychological cognition of executives
would affect the preference of enterprises for financing and thus posed
a challenge to the “New Pecking Order Theory.” With the rise of behavioral
corporate finance research (Baker et al., 2012), capital structure based on
managers’ psychology and behavior is becoming a new avenue for modern
capital structure theory research. With the development of behavioral corporate
1380 K. WANG ET AL.
finance, scholars explain the impact on financing decisions from the perspective
of executives’ behavior (Peng & Wei, 2007).
Psychological research finds frequent bias in people’s judgment and deci
sion-making (Chanowitz & Langer, 1981). In many cases, people use intuition
instead of careful calculations when making decisions (Shauna et al., 2006).
Executives with a financial background and experience command authority in
the field of finance. Investors tend to rely on financial experts, ignoring the
existence of other risks. Intuition leads to this reliance on expert information
by investors whose failure to question such information may be costly to
themselves (Ellen, 2009). Based on the “Upper Echelons” theory and the
behavioral psychology theory, the existing literature focuses on the psycholo
gical and behavioral characteristics of executives, such as overconfidence,
optimistic personality, risk appetite, social and communication skills, and
political connection (Goel & Thakor, 2008; Graham et al., 2013), as well as
on information disclosure and financing preference; it pays little attention to
the financial experience of executives. In addition, there is a lack of research on
the impact path and mechanism.
This study contributes to the existing literature as follows. First, previous
studies investigated the personal characteristics of executives. This study
enriches the “Upper Echelons” theory from the perspective of the secretary’s
financial experience. Second, most studies use the Shanghai and Shenzhen
stock markets for their samples, even though the financing preference and
information disclosure systems of large and small firms are different. This
study examines the impact of a secretary with financial experience on the
financing preference of SMEs and expands the research sample of financing
preference. Additionally, a solution to the financing problem in China’s NEEQ
market will have significance for other developing countries as a reference in
developing their capital markets.
The remainder of this article is organized as follows. The second section
reviews the relevant theoretical and empirical literature on information asym
metry and the effect of a secretary with financial experience on financing
preference and develops the study’s hypotheses. The third section presents
the data and variable descriptions. The sourth section describes the methodol
ogy and presents the empirical results. A summary and conclusions are
presented in the final section.
Theory and hypothesis

Institution and background
The NEEQ market built an investment and financing platform for Chinese
SMEs based on market-structured data. It facilitates the precise docking of
many banks with listed companies and solves the financing problem for SMEs
to a certain extent. However, the quality of information disclosure by listed

SMEs has much room for improvement. At present, the relevant laws and
regulations enforce only the minimum requirements for information disclo
sure, resulting in limited disclosure by the NEEQ companies. Judging by the
operational results, China’s current NEEQ information disclosure system is
below par. It relies on the self-discipline of listed enterprises. For example, the
secretary of the board, as one of the listed company’s executives, can tailor
disclosure information within the scope of the framework to suit the strategic
development goals of the enterprise.
According to the “Company Law of the People’s Republic of China” (here
inafter referred to as the “Company Law”), in addition to managers, deputy
managers, and financial managers, the company’s board secretary is one of the
senior management personnel. According to Article 123 of the Company Law,
“The board secretary of listed companies is responsible for the preparation of
the company’s general meeting of shareholders and board meetings, document
storage, management of company shareholders’ information, and information
disclosure.” It is a mandatory position for listed companies in China. The
secretary’s duties of internal coordination and external information disclosure
make them the legal and practical corporate information disclosure person, as
well as the liaison between enterprises and outside investors and financial
institutions. The board secretary discloses the company’s financial, operating,
and reputation information to the security regulatory authority, investment
institutions, and external media, which have become an important bridge
between the company and external stakeholders.
To achieve this bridging function, the board secretary needs to formulate
the information disclosure management system, urge the company to abide by
the relevant regulations, and coordinate between the enterprise and securities
regulatory agencies, investment institutions, and external media. Therefore,
competency in the scope, depth, and efficiency of information disclosure is
closely related to the personal experience and professional quality of the board
secretary. For example, when responding to inquiries from external investors,
compared to a board secretary without financial experience, the board secre
tary with financial experience will integrate financial information, fully under
stand the operating conditions, improve the financial transparency, reduce
information asymmetry between enterprises and the external investors, and
thus reduce the capital cost and alleviate the enterprise’s financing constraints
(Cheng et al., 2014).
Board secretary and information disclosure

Hambrick first proposed the “Upper Echelons Theory” in 1984. He concluded
that the characteristics of senior executives, such as age, gender, education,
and work experience would affect their behavior and ideas, which in turn
1382 K. WANG ET AL.
would affect their management systems and strategic decisions in the firm
(Bamber et al., 2010); the strategic decisions affected include investment and
financing (Bertrand & Schoar, 2003), mergers and acquisitions (Aggarwal &
Samwick, 2006; Malmendier & Tate, 2005a), capital structure (Frank & Goyal,
2007), information disclosure (Bamber et al., 2010), tax strategy (Dyreng et al.,
2010), corporate performance, and market performance (Bennedsen et al.,
2007).
From a psychological perspective, the information disclosure system in
China’s NEEQ remains with shortcomings, especially in relation to the collec
tion and use of information by investors. Psychological research shows that the
cognitive set hinders people’s judgment. Langer (1975) found that when
information was presented by someone with authority, it was easier for people
to accept without judgment. Auditors, jurists, economists, and others with
titles all raise associated questions. People intuitively regard these titles as
authoritative figures in their respective fields. Compared with those who are
not officially recognized, information disclosed by these “authorities” seems to
be more valuable. For example, corporate executives’ financial achievements
ratified by financial regulators seems to carry more weight when disclosed by
these experts. At the same time, hot interview programs often invite experts to
comment on topical issues, which increases their authority and leads to
a heavier reliance by people on information disclosed by the experts.
The board secretary plays a significant role in the quality of information
disclosure. The secretary is responsible for the preparation of shareholders’
meetings and board meetings, data management, and information disclosure.
They disclose the firm’s financial, operating, and reputation information to
securities regulators, investment institutions, and the media and thus serve as
a “bridge” and a “window” for insiders and outsiders. The board secretary has
the right to know the firm’s financial and operating conditions, organizes the
formulation of information disclosure management systems, and supervises
the firm’s compliance with relevant regulations on information disclosure. The
experience and quality of the secretary determine how both the scale and
efficient disclosure of information are controlled. The secretary receives infor
mation from investors, responds to inquiries, provides information to increase
disclosure and transparency, and thus reduces the information asymmetry
between the firm and the investors. In addition to financial information, firms
disclose social responsibility information to reduce the information asymme
try (Schreck, 2013), thereby reducing the cost of capital and thus external
financing costs (Cheng et al., 2014).
Board secretary and financial experience

The traditional rational person theory assumes that people have consistent
beliefs and coherent preferences when making decisions. When they receive
new information, people correctly adjust their decisions according to Bayes’s

theorem. People make decisions based on criteria such as maximizing sub
jective expected utility (Barberis & Thaler, 2003). However, psychological
studies have found that people are not completely rational, and people’s beliefs
and preferences may systematically deviate from what is considered rational
behavior, such as overconfidence, representativeness, anchoring, and loss
avoidance. Lichtenstein and Fischhoff (1977) found that psychological cogni
tion affected people’s decisions. The higher a person’s cognitive level, the less
overconfident their behavior. The reason is that people with a high cognitive
level tend to collect information from both positive and negative aspects and
thus reduce the judgment bias (Koriat et al., 1980). Executives draw on their
work experience to evaluate their capabilities and financing benefits when they
engage in investment and financing activities. Therefore, a secretary with rich
financial experience is unlikely to be overconfident. In contrast, overconfident
executives tend to overestimate their ability to create value for the company;
consequently, they overestimate the company’s future investment cash
inflows, underestimate external financing needs, and thus reduce investment-
cash flow sensitivity.
The internal financing preference caused by information asymmetry has
always been the focus of academic research. However, the existing studies
focus on credit models (Agostino & Trivieri, 2019), policy institutions
(Hyytinen & Toivanen, 2003), corporate size (Gupta & Mahakud, 2019), the
nature of ownership (Karaivanov et al., 2019), and executive characteristics
(Malmendier & Tate, 2005b). The basic logic comes from agency costs and
information asymmetry theory. The literature pays little attention to the role
of secretaries in financing preference, with no reference to the effect path and
mechanism of financing preference.
Secretaries with a high psychological awareness in the capital market dis
close information well. In addition, according to the informal institutions
theory, in areas where the formal system is lacking, the informal system may
play a substitute role; for example, social networks may be helpful in addres
sing financing needs (Bellone et al., 2010). A relationship with a financial
institution may facilitate low-cost financing (Beck et al., 2018). China is
a relational society, and relations are considered a valuable resource for
many firms. A secretary’s social network facilitates access to useful informa
tion and additional external funding. Firms with financial backgrounds may
obtain low-cost loans from banks (James & Houston, 2001). The financial
experience of the secretary will help maintain a good relationship with external
financial institutions for additional financing (Jiang et al., 2019). Based on this
analysis, we propose Hypothesis 1:
H1: Board secretaries with financial experience prefer external financing, thus
investment-cash flow sensitivity is less.
1384 K. WANG ET AL.
Mechanism: Board secretary and overconfidence
Overconfidence refers to a person with more confidence in their own judgment

than is justified, which leads to bias about uncertain events. Relevant research
holds that, when people compare their skills with those of others, they habitually
believe that their talents are superior to the average (Alicke, 1985; Larwood &
Whittaker, 1977). This psychological tendency of “better than average effect”
also affects individual judgment. People tend to attribute superior results to
themselves and bad results to bad luck. Langer (1975), Weinstein (1980) find
that executives show more overconfidence than ordinary employees.
Overconfidence is manifested in many professional fields—in engineers, doc
tors, lawyers, managers, and entrepreneurs (Lichtenstein & Fischhoff, 1977).
Malmendier et al. (2005b) points out that due to overconfidence, managers
usually overestimate their own knowledge and ability and thereby overestimate
future cash flow. When a company has sufficient internal funds, overconfident
managers tend to overinvest; when there is a lack of internal funds, they consider
the cost of external financing as too high (Heaton, 2002). At this point, the extra
cash flow provides financing for the company’s investment, which leads to a rise
in the company’s investment-cash flow sensitivity.
Empirical results also show that companies with overconfident managers
use more external financing (Koriat et al., 1980). Peng and Wei (2007) use
managers’ gender as a surrogate variable and obtain a similar result. Although
secretaries with financial experience have better psychological cognition and
more resources in the capital market, excessive self-confidence will inhibit
executives’ preference for external financing. Heaton (2002) believe that if
overconfident executives are more optimistic about investment than external
investors, they are more likely to think that the capital market underestimates
the value of the company. They are reluctant to support investment through
external financing, and the sensitivity of investment-cash flow increases.
Malmendier and Tate (2005a) first used an empirical method to study the
investment-cash flow sensitivity under the overconfidence of executives. The
results support Heaton’s theoretical analysis. Based on this analysis, we pro
pose Hypothesis 2:
H2: The lower the secretary’s overconfidence, the more the company prefers
external financing and the less the sensitivity of investment-cash flow.
Mechanism: Board secretary and information asymmetry

Information intermediaries connect fund providers and demanders. Previous
authors have studied the role of information intermediaries such as analysts,
auditors, and the media in alleviating information asymmetry and reducing
external financing cost. Information intermediaries use their professional
knowledge and capabilities to ensure the transmission of information (Hong et al.,

2000). For example, auditors help investors identify the public information dis
closed by firms and improve its quality (Bushman & Smith, 2007; Shores, 1990);
analysts have sufficient energy and ability to explore internal private information
and interpret it for investors’ understanding (Chang & Hilary, 2006; Liu, 2011).
Studies have shown that the existence of external audits reduces the infor
mation asymmetry between firms and external capital markets (Healy &
Palepu, 2001). Investors and financial institutions often claim that statements
audited by high-reputation auditors are authentic and reliable. Therefore,
firms that engage high-reputation auditors tend to receive more attention
from investors and have less information asymmetry. These firms can more
easily obtain low-cost financing from financial institutions such as banks.
Firms that engage high-reputation auditors have higher-quality financial
information and more efficient information dissemination (Eng & Mak,
2003). Many small firms on the NEEQ Market cannot afford the costs of large-
scale auditors. Such small firms receive less attention and have considerable
information asymmetry problems. Therefore, a secretary with financial experi
ence may improve the quality of their information disclosure and reduce their
external financing costs. Based on this analysis, we propose Hypothesis 3:
H3: In greater information asymmetry, the board secretary with financial

experience prefers external financing, thus the investment-cash flow sensitivity
is less.
Empirical method
Data and sample selection
This study selected all listed firms in the NEEQ market from 2012 to 2017. The
résumés of board secretaries were collected manually from the firms’ annual
reports and stock transfer instructions, supplemented by information from the
websites. We then selected the data on board secretaries with financial experi
ence from the résumés. All the firms’ financial data were obtained from the
WIND database.
Five criteria were used to process the samples, based on literature: (a)
eliminating financial and insurance firms, (b) removing prelisting firms, (c)
excluding firms with negative net asset values, (d) eliminating the firms in
which the board secretary had worked for less than one year, and (e) removing
the firms whose relevant data were missing. Our final sample had 4,863
observations. To eliminate the influence of outliers, we winsorized the main
continuous variables at the levels of 1 percent and 99 percent. All the empirical
processes in this study were performed on the Stata 15SE software package.
1386 K. WANG ET AL.
Variable definition
Financial experience of board secretary

Considering that low positions have some limitations in terms of resources,
experience, and behavioral independence, secretaries in low positions are unli
kely to have a significant impact in their work. Therefore, this study focuses on
high-position experience. We deem the board secretary to have had financial
experience if the secretary has previously served as a financial controller,
a finance employee in charge, a chief accountant, or a chief financial officer.
Definition of financing preference

Fazzari et al. (1988) first used the investment-cash flow sensitivity to measure
financing constraints. According to their hypothesis, stock and bond markets
are not perfect: Some firms have limited access to external capital markets and
thus cannot respond quickly to changes in capital market prices. Most small
firms will never be able to raise all the funding they would like from banks and
other institutions (Hamilton et al., 1998). If external funds for a firm are
limited, investment spending will depend more on internal cash flows. In
other words, investments are more “sensitive” to changes in cash flow. As
the sensitivity coefficient of investment-cash flow rises, so does the depen
dence of investment on internal funds, indicating that the firm prefers internal
financing. If the investment-cash flow coefficient is negative, it indicates that
the company prefers external financing. The model has been widely used by
scholars (Shin & Park, 1999). Therefore, we use the investment-cash flow
sensitivity to measure the financing preference.
Control variable
The control variables are divided into corporate governance, corporate man
agement, and personal characteristics of the secretary:
(1) Corporate governance. This study uses the firm ownership (Soe) and the
shareholding of the largest shareholder (First) to measure the property
rights and control structure. Following Cornett et al. (2008), we use the
number of board members (Board) to measure the size of the board of
directors, while we measure management independence based on
whether management holds shares (Msh).
(2) Firm operations. In addition, we use the logarithm of total assets (Size)
at the end of the year to measure firm size, debt ratio (Lev), main
business income/average total assets (Growth) to measure investment
opportunities, and firm establishment time (List).
(3) Personal characteristics of the secretary. To avoid the effect of the
personal characteristics of the secretary on the financing preference,
we controlled for the secretary’s age, education, and gender. At the same
time, we also controlled for the industry and the year. The calculation
method is shown in Appendix Table A1.
We indicate the expected signs based on the results of the previous litera
ture. The prediction results are shown in Column 4 of Table A1 in the
appendix. (+) means the prediction coefficient is positive, and (–) means the
prediction coefficient is negative.
The empirical model

To test whether the board secretary’s financial experience has an impact on the
firm’s financing preference (investment-cash flow sensitivity), we refer to the
research by Custódio and Metzger (2014). We use the empirical model as follows:
Where Inv totali;t is the investment variable set equal to the investment expen
diture/total assets. Financet represents the financial experience of the secretary.
If the secretary has previously served in positions mentioned previously,
Financet is 1, otherwise it is 0. CFt 1 is the cash flow set equal to the net
operating cash flow/total assets; Financet � CFt 1 is our core variable, which is
the interaction of Financet and CFt 1 . Based on the assumptions, we predict
the coefficient of Financet � CFt 1 α2 <0, which indicates that when the secre
tary has financial experience, the enterprise prefers external financing, and the
firm’s investment relies less on internal cash flow; thus the investment-cash
flow sensitivity is low. The control variables are firm Size, leverage, investment
opportunity, the First big shareholder stake, board scale, management share
holding, firm establishment time, State-owned background, secretary age,
education, and gender. Since the CEO’s personal experience also has an impact
on financing decisions, we control for it. At the same time, we also control for
the industry fixed effects and time fixed effect. To control for the influence of
endogenous problems, all explanatory variables, other than Financet , were
lagged by one year, following Custódio and Metzger (2014).
Descriptive statistics
Table 1 shows the descriptive statistics of the main variables in the study. The
number of secretaries to the president with financial experience accounts for
30 percent of the total sample observations. The average (median) of the firm’s
new investment level Inv_total is 0.054 (0.027). The mean (median) cash flow
1388 K. WANG ET AL.
Table 1. Descriptive statistics.

Panel A: Full sample
Variables Mean Median Std Min Max VIF Obs
Inv_total 0.054 0.027 0.072 0.000 1.273 6227
Finance 0.296 0.000 0.457 0.000 1.000 1.07 6227
CF 0.022 0.027 0.133 −1.259 1.400 1.03 6227
Size 18.550 18.560 1.133 15.990 21.420 1.43 6227
lev 0.377 0.372 0.198 0.004 1.000 1.15 6227
Growth 0.746 0.646 0.493 0.004 7.500 1.07 6227
First 47.570 45.980 19.170 4.070 99.990 1.15 6227
Board 5.676 5.000 1.244 0.000 16.000 1.21 6227
Msh 0.772 1.000 0.420 0.000 1.000 1.04 6227
List 11.570 11.000 4.552 1.000 37.000 1.08 6227
Soe 0.044 0.000 0.206 0.000 1.000 1.07 6227
CEO 0.045 0.000 0.207 0.000 1.000 1.00 6227
Age 40.230 39.000 8.148 21.000 72.000 1.16 6227
Edu 2.894 3.000 0.754 1.000 5.000 1.07 6227
Gender 0.509 1.000 0.500 0.000 1.000 1.12 6227
Panel B: Financial experience group
Finance = 1 Finance = 0
Mean Std. Mean Std. Diff.
Inv_total 0.054 0.073 0.054 0.071 0.00

CF 0.024 0.129 0.022 0.134 0.00
Size 18.585 1.113 18.558 1.141 −0.05*
lev 0.376 0.196 0.377 0.198 0.00
Growth 0.744 0.492 0.744 0.494 0.00
First 46.321 18.938 48.007 19.262 1.22**
Board 5.676 1.209 5.682 1.257 −0.03
Msh 0.802 0.407 0.767 0.425 −0.03**
List 11.601 4.565 11.554 4.547 −0.08
Soe 0.050 0.214 0.042 0.203 −0.01
CEO 0.040 0.195 0.047 0.212 0.01
Age 42.610 7.065 39.044 8.362 −3.39***
Edu 2.833 0.724 2.910 0.765 0.09***
Genger 0.439 0.496 0.529 0.499 0.10***
Observations 1,872 4,355
Note. T statistics in parentheses.
***p < .01, **p < .05, *p < .1.
CF is 0.022 (0.027). The mean (median) firm Size is 18.55 (18.56). The mean
value for Soe is 0.045, indicating that 4.5 percent of the firms in the firm sample
are state-owned firms. The mean variance inflation factor VIF is 1.12, indicat
ing no serious multicollinearity problems.
Further, we divide the samples based on whether the secretary has financial
experience and present descriptive statistics for each group. Table 1 Panel
B shows the results. From Panel B, we find that compared with the firms
without financial experience, the firms with financial experience are larger, the
number of the largest shareholders is smaller, there are more management
holdings, and the average difference is significant.
The correlation coefficients of the variables are shown in the correlation
Matrix, with a maximum coefficient of 0.36. Therefore, it may be said that the
empirical analysis is not significantly affected by multicollinearity. (see
Appendix Table A2 for details)
Empirical results
Secretary’s financial experience and financing preference: Basic results
We ran the OLS regression using the whole sample, according to Model 1 and
controlled for the industry fixed and time fixed effects. We also used
a clustering robust standard error to eliminate the effect of heteroscedasticity.
Table 2 shows the basic regression results of the total investment Inv_total on
the interaction term Finance×CF. Column 1 is the regression result without
the control variable and secretary characteristics; Columns 2 ~ 3 are the
regression results without the control variable × CF and secretary character
istics× CF; Column 4 is the regression result that contains the control variable
and the personal characteristics of the secretary.
Table 2 shows that after controlling for the age, education, and gender of the
secretary and for the control variable × CF, the Finance × CF regression
coefficient is always significantly negative; all the regression coefficients are
significant. The results show that financial experience significantly reduces the
firm’s investment-cash flow sensitivity, which indicates that companies prefer
external financing. There is thus evidence in support of Hypothesis 1.
Robustness test
Replace dependent variable

The dependent variable selected is the total investment Inv_total. In the
robustness test, we use the new investment Inv_new to regress (its calculation
method is [cash paid for fixed assets, intangible assets, and other long-term
assets – cash recovered from the fixed assets, intangible assets, and other long-
term assets) / total assets]). The independent and control variables are con
sistent with Model 1. Column 1 in Table 3 shows the regression results for the
new investment Inv_new.
Column 1 of Table 3 shows that before adding the personal characteristics
of the secretary, the regression coefficient for Finance × CF is −0.037, which is
significant at the 5 percent level. The results show that after changing the
measure of financing preference, the results remain significant.
Expand independent variable

The financial experience defined previously only includes high positions. In
the robustness test, we expand the measurement scope of the financial experi
ence and define the secretary with financial experience as one who has held
more positions: Chief Financial Officer, Chief Accountant, Fund Manager,
Investment Manager, Investment Researcher, Securities Researcher, Director
of Securities Investment, Head of Capital Operation, Investment Bank
Manager, Industry Analyst, and other financial investment positions.
1390 K. WANG ET AL.
Table 2. Secretary’s financial experience and financing preference: Basic results.

(1) (2) (3) (4)
Inv_total Inv_total Inv_total Inv_total
Finance × CF −0.028* −0.033* −0.046*** −0.045***
(−1.77) (−1.98) (−2.61) (−2.58)
Finance 0.001 0.001 0.002 0.002
(0.84) (0.79) (0.90) (0.76)
CF 0.075*** 0.074*** −0.620*** −0.545***
(8.44) (7.77) (−3.99) (−3.50)
Age −0.000 −0.000** −0.000**
(−1.58) (−2.34) (−2.10)
Age×CF 0.002** 0.002**
(2.03) (2.03)
Edu 0.000 −0.000 0.000
(0.15) (−0.00) (0.48)
Edu×CF −0.022** −0.022**
(−2.09) (−2.12)
Gender −0.001 −0.000 −0.002
(−0.75) (−0.35) (−1.01)
Gender×CF 0.008 0.009
(0.50) (0.57)
Size 0.001 0.001 0.001
(1.50) (1.36) (1.02)
Size×CF 0.037*** 0.034***
(4.51) (4.11)
Lev −0.020*** −0.018*** −0.020***
(−3.47) (−3.21) (−3.55)
Lev×CF 0.069* 0.070*
(1.81) (1.84)
Growth −0.005** −0.007*** −0.006***
(−2.34) (−3.23) (−2.70)
Growth×CF 0.029* 0.022
(1.68) (1.30)
First 0.000 0.000 0.000
(−1.08) (−1.21) (−1.61)
First×CF 0.000 0.000
(0.97) (0.74)
Board −0.002** −0.002** −0.002**
(−2.50) (−2.15) (−2.24)
Board×CF −0.016** −0.018**
(−2.07) (−2.27)
Msh 0.004* 0.003 0.003
(1.70) (1.24) (1.37)
Msh×CF 0.020 0.018
(1.10) (1.02)
List −0.001*** −0.001*** −0.001***
(−5.03) (−6.21) (−5.22)
List×CF 0.000 0.000
(0.07) (0.13)
Soe −0.011** −0.012** −0.013**
(−2.20) (−2.21) (−2.50)
Soe×CF 0.083* 0.071
(1.86) (1.55)
CEO 0.001 −0.001 −0.002
(0.23) (−0.37) (−0.47)
CEO×CF 0.090** 0.087**
(2.36) (2.29)
Constant 0.049*** 0.0761*** (3.06) 0.076*** 0.087***
(41.52) (3.57) (3.49)
Year No Yes No Yes
Industry No Yes No Yes
Observations 4,334 4,334 4,334 4,334
R2 0.017 0.050 0.049 0.061
***p < .01, **p < .05, *p < .1.
Table 3. Robustness test results.

(1) (2) (3) (4)
Replace dependent Expand independent All Exclude state-owned
variable variable replaced firms
Finance×CF −0.037** −0.039**
(−2.10) (−2.14)
Finance 0.001 0.001
(0.56) (0.33)
Finance_new×CF −0.038** −0.032**
(−2.39) (−1.97)
Finance_new 0.002 0.001
(0.87) (0.60)
CF −0.536*** −0.540*** −0.540*** −0.624***
(−3.42) (−3.80) (−3.77) (−3.84)
Constant 0.083*** 0.090*** 0.086*** 0.078***
(3.27) (3.87) (3.66) (2.97)
Controls Yes Yes Yes Yes
Controls×CF Yes Yes Yes Yes
Year Yes Yes Yes Yes
Industry Yes Yes Yes Yes
Observations 4,334 4,334 4,334 4,334
R2 0.062 0.064 0.065 0.060
Note. T statistics in parentheses. Due to space limitations, the details of control variables are not listed.
***p < .01, **p < .05, *p < .1.
Because investment careers often require a financial foundation, they are also
classified as financial experiences.
Table 3 shows the regression results. In Column 2 are the results after
expanding the scope of the financial experience definition. Column 3 replaces
the dependent variable and expands the independent variable at the same time.
The results show that the regression coefficients for Finance × CF are sig
nificantly negative in Columns 1 ~ 3, suggesting that the empirical data pass
the robustness test, and Hypothesis 1 is further supported.
Exclude state-owned firms

To avoid the impact of privatization of state-owned firms, we delete the sample
of state-owned firms (accounting for 4.5 percent of the total sample). Table 3
shows the empirical results. Column 4 contains the regression results for
Inv_total after excluding state-owned firms. The results show that after exclud
ing the state-owned firms, financial experience still has a significant effect on
financing preference, and the empirical results are robust.
Endogeneity test
Placebo test
The regression results may be influenced by other features that are not
currently observable; therefore, the following method is adopted to indirectly
test whether the missing nonobservable features will affect the estimated
results. According to Model 1, the estimated coefficient value b
β of Financet �
CFt 1 is expressed as follows:
1392 K. WANG ET AL.
z represents all the control variables involved. If γ ¼ 0, then nonobserved

factors will not interfere with the estimation results, and b β are unbiased.
However, it is extremely difficult to directly test whether γ ¼ 0. We can replace
Financet � CFt 1 by a variable that, in theory, has no real effect on the
corresponding Inv totali;t (that is, β ¼ 0). In this case, if we estimate bβ ¼ 0,
we can reversely deduce that γ ¼ 0.
The specific steps of the placebo test are as follows:
(1) We randomly assign secretaries to all companies (assigned by compu

ter) and then perform the regression in Model 1. The coefficient of
Financet � CFt 1 is saved. The random draw is to ensure that the
financial experience of the board secretary will not affect the corre
sponding Inv totali;t , i.e.,b
βrandom ¼ 0.
(2) Repeat the process in (1) 1,000 times, each time saving the coefficient of
Financet � CFt 1 .
(3) Calculate average coefficient of the 1,000 regressions and plot their
kernel density distributions.
In Figure 1, we plot the density distribution of the 1,000 estimates from the
random draw of the board secretary. We find that the distribution of these
estimates is centered around zero (that is, the mean value is −0.0013), and our
estimate using the true financial experience of the board secretary (that is,
−0.045) is beyond the 5 percent quantile of these 1,000 placebo estimates (that
is, the 5 percent quantile is −0.030). Therefore, we can reversely deduce that
γ ¼ 0. These results further demonstrate that the unobserved factors will have
a negligible impact on the estimated results. The estimated results are robust.
This placebo robustness test method has been widely used in domestic and
foreign studies in recent years, such as La Ferrara et al. (2012), Liu and Lu.
(2015), and Zhou Mao et al. (2016).
PSM-DID
It needs to be considered that there may be endogeneity between the financing
preference and the financial experience of the board secretary. For example,
companies that prefer external financing may be more inclined to hire secre
taries with financial experience. To enhance the robustness of the conclusions,
we conduct a Differences-in-Differences (DID) test to mitigate the endogenous
problems. We also use Propensity Score Matching (PSM) to eliminate the
interference factors between the treatment group and the control group.
Figure 1. Distribution of estimated coefficients with placebo financial experience of the board
secretary.
First, we adopted the Nearest-Neighbor Matching (1:1) according to the

main control variables in Model 1 to get the matching treatment group and
control group. We then conducted the DID test on the samples from PSM. The
DID model is as follows:
Where Inv newi;t and Inv totali;t are dependent variables. Treatt is a dummy
variable set equal to 1 (one) when the former secretary lacks financial experience
and the new secretary has financial experience in treatment group, and 0 (zero)
when both the former and new secretaries lack financial experience in the
control group; Postt is a time dummy variable set equal to 1 (one) if firm-year
is after the secretary changes, and 0 (zero) if firm-year is before the secretary
changes. The definition and calculation methods for cash flow CF and other
control variables are consistent with Model 1. In Model 3, we focus on the
1394 K. WANG ET AL.
regression coefficient α3 of the Post*Treat*CF, which indicates the impact of the

new substituted secretary with financial experience on the financing preference.
Figure A1 shows the kernel density distribution after PSM. It shows that after
the Nearest-Neighbor Matching (1:1), the treatment group and the control
group tend to have similar propensity scores. Then, we use the matched firm
to perform a DID test. Table 4 shows the PSM-DID regression results. Columns
2 and 4 are the regressions for controlling the personal characteristics of the
secretary. The interaction coefficients of Post×Treat×CF are significant at the
level of 5 percent. After controlling for the personal characteristics of the
secretary, the regression coefficients are significant at the level of 10 percent.
The coefficients of the four regressions are all significantly negative. This shows
that after using PSM-DID to eliminate the endogeneity, the empirical results
remain robust.
Instrumental variable test

Secretaries with financial experience can reduce the financing constraints of
enterprises, while enterprises with small financing constraints may be more
inclined to recruit secretaries with financial experience, which leads to reverse
causality. We use the 2SLS (two stage least square) regression with interactive
terms, following Ebbes et al. (2016). According to the subject evaluation of the
Ministry of Education of China, regional universities have majors rated A– or
above, including business administration and applied economics; we use this to
construct the instrumental variable (Major), for several reasons: (a) The subject
evaluation results of the Ministry of Education mainly depend on the university
Table 4. PSM and DID model.

(1) (2) (3) (4)
Inv_total Inv_total Inv_new Inv_new
Post×Treat×CF −0.201* −0.256** −0.198* −0.252**
(−1.69) (−2.05) (−1.67) (−2.01)
Post×CF 0.019 0.031 0.009 0.023
(0.35) (0.53) (0.15) (0.39)
Treat×CF 0.007 0.020 0.020 0.030
(0.11) (0.24) (0.36) (0.51)
Post×Treat 0.033** 0.035** 0.035** 0.036**
(1.99) (2.06) (2.18) (2.14)
Post −0.008 −0.002 0.007 0.021
(−1.06) (−0.31) (0.11) (0.27)
Treat −0.003 −0.004 −0.003 −0.005
(−0.24) (−0.28) (−0.21) (−0.36)
CF 0.005 −2.289*** 0.032* 0.034**
(0.13) (−4.04) (1.92) (2.00)
Constant 0.049*** 0.019 0.048*** 0.0150
(8.29) (0.28) (8.15) (0.22)
Controls No Yes No Yes
Controls×CF No Yes No Yes
Observations 397 397 397 397
R2 0.032 0.129 0.030 0.126
***p < .01, **p < .05, *p < .1.
subject development level and decision of the Ministry of Education and are not
affected by the NEEQ market financing preference; (b) The proportion of
graduation students who stay in the local area (especially provincial capitals
and other well-known cities) is large. Therefore, in areas where the applied
economics and business management disciplines are better evaluated, the secre
tary is more likely to have financial experience and better financial ability. In
other words, this instrumental variable is relevant to the financial experience of
the regional secretary. Therefore, whether regional universities have business
administration or applied economics that is rated A– or above is a reasonable
instrumental variable.
Table 5 shows the results of the 2SLS regression. Columns 1 ~ 2 are the
regression of the endogenous variables Finance and Finance × CF in the first
stage, and Column 3 is the regression of Inv_total in the second stage. In the
first stage regression, the significance level of Major and Major × CF is more
than 5 percent, and the Cragg-Donald Wald F statistic of the two regressions is
greater than 10, which means Major is not a weak instrument variable. In
Column 3, the variable Finance × CF is negatively significant at the 5 percent
level, which is consistent with the basic regression results. It may thus be
concluded that after using instrumental variable to eliminate the endogeneity,
the empirical results remain robust.
Mechanism of impact
We further examine the impact mechanism of financial experience on finan
cing preference. Specifically, we investigate the mechanism of reducing over
confidence and information asymmetry.
Table 5. Instrumental variable test.

(1) (2) (3)
Finance Finance×CF Inv_total
Major −0.028* 0.001
(−1.93) (0.57)
Major×CF 0.181* 0.067***
(1.75) (4.64)
Finance 0.233
(1.63)
Finance×CF −1.079**
(−2.14)
CF −0.178** 0.265*** 0.410***
(−2.22) (23.74) (2.58)
Constant −0.193* −0.030 0.088*
(−1.40) (−1.59) (1.78)
Controls Yes Yes Yes
C-D Wald F stat. 20.10 125.82
Observations 4,334 4,334 4,334
R2 0.065 0.304 .
Note. T statistics in parentheses. Due to space limitations, the details of the control
variables are not listed.
***p < .01, **p < .05, *p < .1.
1396 K. WANG ET AL.
Reducing overconfidence
As a psychological factor, executive overconfidence is difficult to measure
directly. Therefore, domestic and foreign scholars use alternative indicators
to measure executive overconfidence:
(1) the mainstream media’s evaluation of executives,

(2) the relative salary of executives,
(3) enterprise’s historical performance (The above three are from Hayward
& Hambrick, 1997),
(4) senior management’s shareholding status (Malmendier & Tate, 2005a),
(5) business profit forecast bias (Ben-David et al., 2010), and
(6) merger frequency (Doukas & Petmezas, 2007).
However, these mainstream foreign indicators are not necessarily applicable

to China. It is difficult to reflect the managers’ confidence accurately using the
business climate index. The mainstream media’s evaluation of managers is less
negative yet difficult to use to quantify the level of a manager confidence. After
2001, corporate profit forecasts changed from being mandatory disclosure to
voluntary disclosure, so that only limited data could be collected. Considering
the availability of data and China’s national conditions, this study chose the
shareholding change of the board secretary to measure overconfidence.
Malmendier and Tate (2005b) claim that there is no significant correlation
between the tendency of executives to voluntarily hold stock and future excess
returns on stocks. Therefore, they believe that executives’ voluntary holding of
stock reflects overconfidence. When a company has sufficient internal funds,
the overconfident managers tend to overinvest; and when it lacks internal
funds, they consider the cost of external financing as too high (Heaton, 2002)
and reduce the company’s investment. When this happens, the company’s
internal cash flow provides the company’s investment, resulting in increased
investment-cash flow sensitivity. Peng and Wei (2007) uses managers’ gender
as a surrogate variable for managers’ overconfidence and obtains a similar
result.
This study uses changes in the number of shares held by executives during
their tenure as a measure of overconfidence. Considering the current share
holding characteristics of the NEEQ, we classify the executives who held the
same number of shares during their employment as nonoverconfident. If an
increase in the number of shares is not due to bonus shares or performance
stocks, we regard these executives as overconfident. In Table 5, Columns 1 ~ 2,
the regression coefficient of Finance × CF of the overconfidence group is
−0.075, which is not significant, and −0.049 in the Nonoverconfidence
group, which is significant at the 1 percent level. The results show that over
confidence inhibits the reduction of the financial experience effect on
investment-cash flow sensitivity. Thus secretaries with low overconfidence

prefer external financing, supporting Hypothesis 2.
Reduce information asymmetry

To verify whether a secretary with financial experience can increase external
financing by reducing information asymmetry, we divided the sample into
a high information asymmetry environment and a low information asymme
try environment. If the financial experience of a secretary is more significant in
the high information asymmetry environment, it means that the financial
experience of the secretary increases external financing by reducing informa
tion asymmetry. To divide the sample, we used the size of the audit agency as
a proxy indicator for asymmetric information. The size of the audit agency is
based on whether the firm is audited by the foreign Big Four and China’s Big
Eight auditors. Because most firms in the NEEQ Market cannot afford the high
cost of the foreign Big Four auditors, few firms choose the Big Four. Therefore,
we chose the foreign Big Four and domestic Big Eight auditing agencies to
divide the sample. When the auditor employed by the firm belongs to the Big
Four or Big Eight, the audit agency size equals 1 (one); otherwise it equals 0
(zero). Compared with small-scale and low-reputation audit institutions,
large-scale audit institutions have a higher level of information disclosure,
which has a substitute role for the secretary; thus the secretary with financial
experience may have less impact on firms that engage large audit institutions.
In Table 6, Columns 3 ~ 4, the coefficient for the non-Big Twelve auditors is
−0.076, which is significant at the level of 1 percent. It suggests that financial
experience tends to reduce investment-cash flow sensitivity in firms who
engage small-scale audit institutions, thus supporting Hypothesis 3. Based
on this analysis, we examined the mechanism of the effect of financial experi
ence on financing preference. The financial experience of the secretary
Table 6. Mechanism of impact.

(1) (2) (3) (4)
Overconfidence Nonoverconfidence Non-Big Twelve Big Twelve
Finance×CF −0.075 −0.049*** −0.076*** 0.018
(−1.52) (−2.60) (−2.94) (0.69)
CF −1.951*** −0.290* −0.380* −0.588**
(−4.95) (−1.73) (−1.68) (−2.57)
Finance 0.004 0.001 0.004 0.000
(0.71) (0.20) (1.21) (0.00)
Constant 0.201*** 0.058** 0.055 0.130***
(2.92) (2.20) (1.55) (3.45)
Controls Yes Yes Yes Yes
Controls×CF Yes Yes Yes Yes
Observations 838 3,496 2,205 1,729
R2 0.114 0.067 0.069 0.113
***p < .01, **p < .05, *p < .1.
1398 K. WANG ET AL.
promotes the external financing preference in a large information asymmetry

environment.
Further research
Fazzari et al. (1988) first used the coefficient of investment-cash flow to
measure financing constraint and believed that the greater the investment-
cash flow sensitivity, the more the company relied on internal cash flow.
However, this model is controversial. Kaplan and Zingales (1997), Cleary
(1999), and Erickson and Whited (2000) contend that the investment-cash
flow model may have shortcomings: First, the measurement bias. These
studies all use Tobin’s Q to measure investment opportunities; however, as
the Chinese stock market lacks efficiency, this indicator inevitably has ser
ious measurement bias (Erickson & Whited, 2000). This is because stock
prices can only reflect historical information at a given time and is not
forward-looking. The measurement bias in Tobin’s Q will lead to statistical
error. At a given time, the parameter estimates of all variables in the model
will be biased. The parameter estimates of variables with measurement errors
are usually extremely close to zero, whereas variables without explanatory
power may be extremely significant. The R2 of the model will also be
seriously underestimated.
Second, this literature is based on the model for motivation testing; how
ever, this model is not suitable for studying Chinese listed companies: (a) Vogt
(1994) assumed that low-growth companies had abundant free cash flow but
lacked investment opportunities, whereas high-growth companies were on the
contrary. However, most Chinese listed companies are low growth and low
profitability. (b) Vogt assumed that, after introducing the interaction item, the
model would remain linear. However, Myers and Majluf (1984) showed that
underinvestment would become more serious as investment opportunities
increased, which meant that the interaction coefficient of cash flow in
Tobin’s Q was related to the change in Tobin’s Q. As a result, the model
showed a nonlinear relationship. At this point, the interaction coefficient no
longer has the meaning it did under the linear model setting.
To avoid the questions about the financing preference of the investment-
cash flow sensitivity, we used different financing methods to measure internal
and external financing preferences to specifically examine the influence of the
board secretary’s financial experience on financing preferences. The current
financing channels of NEEQ enterprises include retained earnings, private
placement, and credit loans. The retained earnings are internal financing. The
latter two are equity financing and debt financing respectively, which fall
under external financing. Retained earnings is the sum of undistributed profits
and surplus reserves. It is the retained profits of the enterprise after the
distribution of dividends. It is equivalent to the reinvestment of profits by
the owner of an enterprise and therefore can be used as a substitute variable for
internal financing.
Following Benmelech and Frydman (2015), we used retained earnings,
private placement, and short-term loan and long-term loan divided by total
assets as the dependent variable for regression, with the control variables
consistent with Formula 1. Table 7 examines the influence of the board
secretary with the financial experience on different financing methods of the
enterprise. In Column 1, representing internal financing, the coefficient of
board secretary with financial experience is significantly negative at the 1 per
cent level, while in Columns 2 to 4, representing external financing, only
Column 3 has a significant positive impact on short-term loans. The results
show that the companies with the board secretary with financial experience
prefer external financing, mostly in the form of short-term loans. The regres
sion results also indirectly support Hypothesis 1.
Table 7. Influence of board secretary’s financial experience on different financing methods.

(1) (2) (3) (4)
Internal financing Private Placement Short-term loan Long-term loan
Finance −0.007** 0.004 0.009* 0.007
(−2.13) (0.59) (1.82) (1.26)
CF −0.039*** −0.217*** 0.288*** −0.008
(−3.20) (−8.97) (15.91) (−0.36)
Size −0.006*** −0.018*** 0.064*** 0.007***
(−4.13) (−5.23) (25.92) (2.87)
Lev 0.294*** −0.355*** −0.394*** 0.104***
(34.93) (−20.22) (−30.93) (7.53)
Growth −0.00100 −0.032*** 0.074*** −0.042***
(−0.30) (−4.34) (13.93) (−6.59)
First 0.000*** 0.000 0.001*** 0.000**
(5.74) (−0.64) (5.94) (1.99)
Board 0.002 −0.003 −0.003 0.003
(1.60) (−1.10) (−1.39) (1.44)
Msh 0.004 −0.011 0.011** 0.001
(1.25) (−1.46) (2.02) (0.11)
List 0.000 −0.003*** 0.000 −0.001
(−1.53) (−4.46) (−0.70) (−1.57)
Soe −0.022*** 0.038** −0.022** 0.055***
(−3.11) (2.02) (−2.08) (4.99)
Age −0.000** −0.001*** 0.000 0.000
(−2.44) (−2.76) (0.81) (1.35)
Edu −0.005** −0.002 0.004 0.002
(−2.46) (−0.56) (1.44) (0.66)
Gender 0.010*** 0.000 −0.013*** −0.003
(3.25) (−0.03) (−2.73) (−0.63)
CEO −0.002 −0.002 0.017 0.031***
(−0.33) (−0.14) (1.62) (3.14)
Constant 0.122*** 0.781*** −0.925*** 0.004
(4.03) (11.55) (−20.06) (0.09)
Observations 4,008 1,933 5,501 1,008
R2 0.295 0.326 0.274 0.151
***p < .01, **p < .05, *p < .1.
1400 K. WANG ET AL.
Due to the uneven development of China’s external financing channels,

SMEs’ debt consists mostly of bank loans. Secretaries with financial experi
ence can increase the transparency of information between companies and
banks and facilitate loans from banks. However, the credit contract is the
result of a game between the enterprise and the bank in the credit allocation
process. On the one hand, the board secretary with financial experience
prefers external financing, which leads to higher leverage for the enterprise,
more bank loans, and higher financial risks; on the other hand, as the risk of
corporate default increases, banks adjust the credit contracts. The debt
maturity structure is an important part of the credit contract. To manage
the corporate default risk, the bank will reduce long-term loans and increase
short-term loans.
Conclusion
This study uses China’s NEEQ market firms as a sample to investigate the
impact of board secretaries on corporate financing preferences. There are five
main conclusions from the study:
(1) The financial experience of the board secretary can significantly reduce
the firm’s investment-cash flow sensitivity through external financing
preferences.
(2) We applied the method of replacing financing preference, expanding
the scope of financial experience definition, and removing state-owned
firms from the sample to perform the robustness test. The results of the
robustness test are consistent with the main test and validate the
empirical conclusions.
(3) To resolve the effect of endogeneity, we used the placebo test, PSM-
DID, and 2SLS regression to control for the endogeneity. Using the
placebo test, 1,000 simulations were performed, and a kernel density
distribution of the coefficient was obtained. Using the change from the
secretary who has no financial experience to the secretary who has
financial experience as the treat group, the regression analysis was
conducted using the PSM-DID. Using firm location and university
information, we constructed our instrumental variable for the 2SLS
regression based on whether regional universities have majors rated
A– or above, including business administration and applied economics.
After resolving the endogenous problems with these methods, the
empirical conclusions remained robust.
(4) Reducing overconfidence and information asymmetry costs are the
mechanisms by which the secretary’s financial experience affects finan
cing preference.
(5) Secretaries with financial experience can promote external financing,

albeit mostly short-term loans.
Discussion
Existing literature focuses on company characteristics (such as corporate size,
debt ratio, surplus, equity structure, and corporate nature [Eng & Mak, 2003;
Fan & Wong, 2002]), information intermediaries (such as analysts, auditors,
and media [Bushee et al., 2010; Cheng et al., 2014]), institutional environment
(such as government intervention and legal systems [Bushman & Piotroski,
2006]), and tax policy (Ball et al., 2004) and others in reducing the asymmetry
of information in the main board market and improving the quality of
information disclosure of main board companies, but paying less attention
to the role of the board secretary as the information publisher in the process of
information transmission. In addition, existing studies rarely pay attention to
the influence of the personal characteristics of the board secretaries on the
NEEQ market, where many small and medium-sized enterprises gather.
Therefore, this study expands the research on the influence of executives on
companies’ financing preferences and provides a reference for further research
on the NEEQ market in the future.
Previous studies have shown that financial information often occupies an
important position in corporate information disclosure due to its profession
alism, high attention, and consulting volume (Graham et al., 2013). As an
executive of an SME, whether the board secretary has financial experience
directly affects the completeness and accuracy of corporate information dis
closure, as well as the professionalism and credibility of information inter
pretation (Custódio & Metzger, 2014). Therefore, this study makes full use of
the existing data of the NEEQ market to construct the dummy variable for the
secretary’s financial experience to explore its influence on the financing pre
ferences of SMEs. The conclusions drawn are consistent with previous
research. However, due to a lack of data, this study could not further refine
financial experience to financial experience years and the highest position ever
held. With ongoing development of the NEEQ market and improved informa
tion disclosure, we will expand this research in the future.
Fazzari et al. (1988) first used the sensitivity of investment cash flow to
measure financing constraints. According to their hypothesis, the greater the
sensitivity of the investment cash flow, the more the company prefers internal
financing. However, this model has shortcomings: One is the measurement bias
in Tobin’s Q; the other is whether the investment-cash flow sensitivity is related
to financing constraints. Kaplan and Zingales (1997) were the first to question
this. They divided the 49 companies with the most severe financing constraints
in the sample of Fazzari et al. (1988) into three subsample groups and obtained
a result opposite to that obtained by Fazzari et al. (1988): Companies with lower
1402 K. WANG ET AL.
financing constraints showed stronger cash flow sensitivity. Based on empirical

results from a large sample, Cleary (1999) asserted that this “abnormal” result
could be explained by the free cash flow hypothesis, and financing constraints
were not the only cause of investment-cash flow sensitivity. A series of studies
are based on the Vogt (1994) model in an attempt to verify whether the
financing constraint hypothesis or the free cash flow hypothesis is more expla
natory. Research by Erickson and Whited (2000) on listed companies in the
United States suggested that, when the Tobin’s Q measurement bias was
properly controlled, cash flow did not have a significant impact on investment.
However, a series of studies on Chinese listed companies find that invest
ment is indeed sensitive to cash flow and believe that it is caused by financing
constraints (Feng, 1999; Jiang et al., 2019). Lian and Cheng (2007) indicate that
the studies by Kaplan and Zingales (1997), Cleary (1999), and Vogt (1994)
have two main limitations: First, the measurement bias. These studies all use
Tobin’s Q to measure investment opportunities; since the Chinese stock
market lacks efficiency, this indicator inevitably has serious measurement
bias (Erickson & Whited, 2000) because stock prices can only reflect historical
information at a given time and are not forward-looking. The measurement
bias in Tobin’s Q will lead to statistical error, such that the parameter estimates
of all variables in the model will be biased. The parameter estimates of
variables with measurement errors are usually extremely close to zero, whereas
variables without explanatory power may be highly significant. The R2 of the
model will also be seriously underestimated.
Second, these studies are based on the Vogt (1994) model for motivation
testing, even though this model is not suitable for studying Chinese listed
companies:
(1) Vogt (1994) assumed that low-growth companies had abundant free
cash flow but lacked investment opportunities, whereas high-growth
companies were the opposite case. However, most Chinese listed com
panies are low growth and low profitability.
(2) Vogt assumed that, after introducing the interaction item, the model
would remain linear. However, Myers and Majluf (1984) asserted that
underinvestment would become more serious as investment opportu
nities increased, which would mean that the interaction coefficient of
cash flow and Tobin’s Q was related to the change in Tobin’s
Q. Consequently, the model showed a nonlinear relationship. Thus,
the interaction coefficient no longer had the meaning it did under the
linear model setting.
After controlling for Tobin’s Q measurement bias, Lian and Cheng (2007)
found that investment expenditure remained extremely sensitive to cash flow.
To avoid the questions about the financing preference of the investment-cash
flow sensitivity, we used different financing methods to measure internal and

external financing preferences to specifically examine the influence of the
board secretary’s financial experience on financing preferences. The results
showed that the board secretary with financial experience would increase the
company’s external financing, albeit mostly in the form of short-term loans.
Existing literature analyzes the influence mechanism of senior executives’
financial experience on enterprises’ financing preference, considering mainly the
external influence mechanism—that is, executives with financial experience can
attract more analysts and institutional investors and thus reduce the degree of
information asymmetry in external financing (Bushman & Smith, 2001; Chang &
Hilary, 2006; Hong et al., 2000), which is consistent with the conclusion of this
article. However, previous studies rarely analyze the influence of financial experi
ence on personal cognition and psychological decision-making. Based on the
theory of behavioral finance, this study explores how the board secretary’s financial
experience reduces their degree of overconfidence, thereby improving the com
pany’s external financing and reducing the sensitivity of investment-cash flow.
This research enriches the literature on the “Upper Echelons Theory.” However,
since the current index evaluation system of China’s NEEQ market is not com
plete, the method for measuring overconfidence variables in this study is relatively
limited. In future research, we will use changes in manager’s shareholding ratio,
media evaluations, earnings forecast deviations, the consumer confidence index,
and other factors to comprehensively construct overconfidence indicators.
Disclosure statement
The authors declare that they have no conflicts of interest.
Funding
This work was supported by the Department of Science and Technology of Sichuan Province
[No. 2018JY0594]; National Natural Science Foundation of China [No. 71072066]; Sichuan
University [No. 2018HHF-42,No. SKGT201602].
ORCID
Kun Wang http://orcid.org/0000-0002-1239-5383
Yaozhi Chen http://orcid.org/0000-0002-4849-9862
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Appendix
Table A1. Variable definition.

Expected
Variable Implication Definition signs
Inv_total Total investment Cash for fixed assets, intangible assets, and other long-term
assets/total assets
Finance Financial experience of The dummy variable equals 1 (one) if the secretary has financial
board secretary experience, and 0 (zero) otherwise
CF Operating cash flow Net cash flow generated from operating activities/total assets
Size The firm size The natural log of total assets (–)
Lev Debt ratio Total liabilities/total assets (+)
Growth Investment Main business income/total assets (–)
opportunities
First The largest shareholderNumber of shares held by the largest shareholder/total number (+)
shareholding ratio of shares
Board, Board size Number of directors (–)
Msh Management Equals one if the management holds the share, and zero (+)
shareholding otherwise
List Time of establishment Current year – year of establishment (–)
Soe State-owned Dummy variable, equals 1 (one) if the firm is controlled by state- (–)
background owned firm, and 0 (zero) otherwise
CEO Financial experience ofThe dummy variable equals 1 (one) if the CEO has financial (–)
CEO experience, and 0 (zero) otherwise
Age Board secretary age Age of secretary (+)
Edu Secretary education Equals 1 (one) if secretary has high school or below education, 2 (–)
(two) if secretary has junior college education, 3 (three) if
secretary has bachelor’s degree, 4 (four) if secretary has master
degree, and 5 (five) if secretary has doctor degree or above
Gender Board secretary gender Equals 1 (one) if the secretary is men and 0 (zero) otherwise (+)
Table A2. Correlation matrix.
Inv_total Finance CF Size lev Growth First Board Msh List Soe CEO Age Edu Gender
Inv_total 1
Finance 0.001 1
CF 0.169* 0.004 1
Size 0.019 0.020* 0.075* 1
lev −0.015 −0.004 0.01 0.226* 1
Growth −0.078* −0.002 0.080* −0.126* 0.162* 1
First −0.020* −0.029* 0.064* −0.227* 0.104* 0.076* 1
Board −0.015 0.01 0.002 0.361* 0.015 −0.058* −0.206* 1
Msh 0.017 0.028* −0.028* 0.065* −0.014 0.008 −0.134* 0.053* 1
List −0.106* 0.008 0.069* 0.223* 0.023* −0.016 −0.032* 0.150* −0.002 1
Soe −0.031* 0.011 0.037* 0.152* 0.063* −0.020* 0.070* 0.137* −0.115* 0.059* 1
CEO 0.012 −0.017 0.018 0.002 −0.017 −0.002 −0.013 0.001 −0.031** 0.009 0.028* 1
Age −0.034* 0.190* 0.061* 0.147* 0.024* −0.017 −0.109* 0.094* 0.040* 0.163* 0.050* −0.015 1
Edu −0.01 −0.052* −0.019 0.105* −0.098* −0.078* −0.099* 0.096* 0.029* 0.01 0.045* 0.008 −0.052* 1
Gender −0.005 −0.091* 0.039* 0.199* 0.050* −0.026* −0.055* 0.094* −0.004 0.029* 0.074* 0.003 0.224* 0.122* 1
*Statistical correlation between variables.
JOURNAL OF SMALL BUSINESS MANAGEMENT
1409
1410 K. WANG ET AL.
Figure A1. Kernel density after matching.

Board Secretary S Financial Experience Overconfidence and SMEs Financing Preference Evidence From China S NEEQ Market

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Board secretary’s financial experience,

Kun Wang, Yaozhi Chen, Yao Liu & Yingkai Tang

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Board secretary’s financial experience, overconfidence, and

Theory and hypothesis

to a certain extent. However, the quality of information disclosure by listed

Board secretary and information disclosure

Board secretary and financial experience

new information, people correctly adjust their decisions according to Bayes’s

Mechanism: Board secretary and overconfidence

Overconfidence refers to a person with more confidence in their own judgment

Mechanism: Board secretary and information asymmetry

knowledge and capabilities to ensure the transmission of information (Hong et al.,

H3: In greater information asymmetry, the board secretary with financial

Financial experience of board secretary

Definition of financing preference

The empirical model

Table 1. Descriptive statistics.

Inv_total 0.054 0.073 0.054 0.071 0.00

Replace dependent variable

Expand independent variable

Table 2. Secretary’s financial experience and financing preference: Basic results.

Table 3. Robustness test results.

Exclude state-owned firms

z represents all the control variables involved. If γ ¼ 0, then nonobserved

(1) We randomly assign secretaries to all companies (assigned by compu­

First, we adopted the Nearest-Neighbor Matching (1:1) according to the

regression coefficient α3 of the Post*Treat*CF, which indicates the impact of the

Instrumental variable test

Table 4. PSM and DID model.

Table 5. Instrumental variable test.

(1) the mainstream media’s evaluation of executives,

However, these mainstream foreign indicators are not necessarily applicable

investment-cash flow sensitivity. Thus secretaries with low overconfidence

Reduce information asymmetry

Table 6. Mechanism of impact.

promotes the external financing preference in a large information asymmetry

Table 7. Influence of board secretary’s financial experience on different financing methods.

Due to the uneven development of China’s external financing channels,

(5) Secretaries with financial experience can promote external financing,

financing constraints showed stronger cash flow sensitivity. Based on empirical

flow sensitivity, we used different financing methods to measure internal and

Table A1. Variable definition.

Figure A1. Kernel density after matching.

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(1) We randomly assign secretaries to all companies (assigned by compu

regression coefficient α3 of the PostTreatCF, which indicates the impact of the