Managerial Overconfidence and Accounting Conservatism
March 2013 | Ahmed, Anwer
Overconfident managers overestimate future returns from their firms’ investments. Thus, we predict that overconfident managers will tend to delay loss recognition and generally use less conservative accounting. Furthermore, we test whether external monitoring helps to mitigate this effect. Using measures of both conditional and unconditional conservatism respectively, we find robust evidence of a negative relation between CEO overconfidence and accounting conservatism. We further find that external monitoring does not appear to mitigate this effect. Our findings add to the growing literature on overconfidence and complement the findings in Schrand and Zechman  that overconfidence affects financial reporting behavior.
- Scott Duellman
Journal of Accounting Research