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Purpose This paper aims to investigate whether managerial overconfidence has an impact on investment inefficiency beyond its influence on the use of internal financing or whether internal financing behaves as a full intermediary. Design/methodology/approach The study employed three dependent variables, namely business investment scale, overinvestment and underinvestment, and analyzed data from 282 firms across five different industries listed in 11 Middle East/North Africa (MENA) countries between 2013 and 2019 using regression analysis via least square dummy variable (LSDV). Findings The findings indicate that while internal financing can provide funding for investment opportunities and address capital shortages, it may also result in overinvestment, particularly in companies led by overconfident managers. Practical implications Stakeholders, including shareholders and board of directors, should pay attention to the chief executive officer (CEO)'s behavioral aspects such as overconfidence in decision-making while undertaking new investment projects. Additionally, regulators and policymakers in emerging markets like MENA should re-evaluate the corporate governance framework, devise a corporate governance index and promote boardroom gender diversity as it can significantly reduce risk. Originality/value This study adds to the limited research on the impact of managerial overconfidence on investment efficiency in the MENA region. By focusing on this region, which has unique economic, political and social characteristics, the study provides new insights into the role of behavioral biases in investment decision-making in emerging markets.
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