Does ownership structure drive the effect of CEO overconfidence on earnings quality?

Bilel Bzeouich, Florence Depoers and Faten Lakhal

Journal of Applied Accounting Research, 2024, vol. 26, issue 1, 90-115

Abstract: Purpose - The purpose of this paper is to examine the effect of chief executive officer (CEO) overconfidence on earnings quality and the moderating role of ownership structure as a crucial corporate governance device. Design/methodology/approach - The paper uses the generalized method of moments (GMM) estimation method to test our models on a sample of 335 French companies between 2009 and 2020, i.e. 4,020 observations. Findings - The results show that CEO overconfidence negatively affects earnings quality. This result supports the predictions of behavioral finance theory and suggests that CEO overconfidence is a behavioral bias that affects the quality of earnings. The authors also examined the effect of different types of ownership structures on this relationship. The results show the significant role of controlling shareholders, owner-managers, families and institutional investors in mitigating the negative effect of CEO overconfidence on earnings quality. Research limitations/implications - This paper has some limitations. First, other types of ownership structures could have been analyzed such as state ownership. Second, we ignored the role of the board of directors as an important governance mechanism in controlling overconfident CEOs’ actions. Practical implications - Companies should be aware of the potential risks associated with CEO overconfidence, which can compromise the faithful representation of earnings. This highlights the importance of effective monitoring and internal controls to detect and prevent such practices, which involve the role of ownership structure. Originality/value - This paper addresses the effect of CEO overconfidence on earnings quality and provides new evidence on the role of different ownership structure types in shaping this relationship. Additionally, this paper sheds new light on how overconfident CEOs may behave in challenging times.

Keywords: CEO overconfidence; Earnings quality; Ownership concentration; Family ownership; Managerial ownership; Institutional ownership (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-10-2022-0265

DOI: 10.1108/JAAR-10-2022-0265

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