Managerial overconfidence and accounting conservatism

Corporate Financial Policies With Overconfident Managers

The inclusion of purchase and sales information of the CEO causes us to lose an additional 2, firm-years leaving a final sample of 12, in our sample when Purchase is the measure of managerial overconfidence.

First, our study demonstrates Managerial overconfidence and accounting conservatism of conditional conservatism in Indian financial reporting using a large sample of Indian firm-years firm years from financial year to financial year Khan and Watts [] utilize a firm specific estimation of the timeliness of good news G-Score and bad news C-Score and document evidence consistent with conservatism increasing in the C-score.

This suggests the following hypothesis: We propose that managerial beliefs help to explain the remaining variation across and within firms, including variation in debt conservatism and in pecking-order behavior.

Using measures of both conditional and unconditional conservatism, we find robust evidence of a negative relation between CEO overconfidence and accounting conservatism. Conditional Conservatism and Unconditional Conservatism. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: We control for leverage Leverage as Ahmed et al.

Also, the intercept term is positive and significant, which indicates that unrealized gains from previous periods, uncorrelated with current news, are recognized in current periods.

Prowess is a database of the financial performance of Indian companies. Correaltion is significant at. We further find that external monitoring does not appear to mitigate this effect. Table 8 shows statistically significant perfect negative correlation between size of the firm and the level of conservatism.

Our second unconditional conservatism measure, Skewness, is the difference between cash flow skewness and earnings skewness developed by Givoly and Hayn []. Thus, overconfidence would lead to less conditionally conservative financial reporting. The annual cross-sectional regression model [9] used to estimate C-Score, firm-year measure of conditional conservatism and G-Score, firm-year measure of good news timeliness, is: Section 4 presents the empirical results and Section 5 concludes the paper.

The stock option based measure of overconfidence Holder67 is positively correlated with Purchase 0. We control for large firms as Watts and Zimmerman [] argue that firms face higher political costs that may induce them to use more conservative accounting. We set Over-Invest equal to one if the residual from the excess investment regression is greater than zero, and equal to zero 11 Results are qualitatively similar if we define CAPEX as firms with industry adjusted capital expenditures in the top quintile, quartile, or tercile.

We find that, conditional on accessing public markets, CEOs who personally overinvest in their companies are significantly less likely to issue equity. Hribar and Yang [], using a sample of firms listed in the Fortune fromfind that overconfident managers are more likely to issue a management forecast.

With respect to the potential mitigating effect of external monitoring, we do not find evidence that the relation between conservatism and overconfidence weakens for firms with higher external monitoring. An alternative explanation for the negative relation between managerial overconfidence and conservatism is that overconfident managers self-select into firms with less conservative accounting.

Though the future outcome may be losses as well as gains, but the investors are concerned about the negative outcome.

All variables are as previously defined. C-score decile wise mean values of selected variables.Free Essay: Managerial Overconfidence and Accounting Conservatism* Anwer S. Ahmed Ernst & Young Professor of Accounting Texas A & M University Scott.

Managerial Overconfidence and Accounting Conservatism MANAGERIAL OVERCONFIDENCE In the finance literature, an overconfident manager is viewed as a manager who systematically overestimates future returns from the THE EFFECT OF OVERCONFIDENCE ON ACCOUNTING CONSERVATISM.

Financial Accounting – Accounting Conservatism, Corporate Governance, Managerial Overconfidence, Customer Switching Costs, and Earnings Management Education. Overconfidence and Early-life Experiences: The Effect of Managerial Traits on Corporate Financial Policies ULRIKE MALMENDIER, GEOFFREY TATE, and JON YAN.

Publications and Working PapersPublished Papers:Pilot CEOs and Corporate Innovation, with Shyam V. Sunder (University of Arizona) and Jingjing Zhang (McGill University), accepted at Journal of Financial mint-body.come Sheet Conservatism and Debt Contracting, with Shyam V.

Sunder (University of Arizona) and Jingjing Zhang (McGill University), accepted at Contemporary Accounting Research. Using measures of both conditional and unconditional conservatism respectively, we find robust evidence of a negative relation between CEO overconfidence and accounting conservatism.

Managerial Overconfidence and Accounting Conservatism

We further find that external monitoring does not appear to mitigate this effect.

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Managerial overconfidence and accounting conservatism
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