Managerial Overconfidence and Accounting Conservatism

Anwer S. Ahmed and Scott Duellman

Journal of Accounting Research, 2013, vol. 51, issue 1, 1-30

Abstract: 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 by Schrand and Zechman [2011] that overconfidence affects financial reporting behavior.

Date: 2013
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https://doi.org/10.1111/j.1475-679X.2012.00467.x

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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