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Executive overconfidence and the slippery slope to financial misreporting

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  • Schrand, Catherine M.
  • Zechman, Sarah L.C.
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    Abstract

    A detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent. In the remaining three quarters, the initial misstatement reflects an optimistic bias that is not necessarily intentional. Because of the bias, however, in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings. Overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements. Evidence from a high-tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and AAERs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 53 (2012)
    Issue (Month): 1 ()
    Pages: 311-329

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    Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:311-329

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Executive overconfidence; Fraud; Earnings management; Corporate governance;

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    References

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    Cited by:
    1. Gerakos, Joseph & Kovrijnykh, Andrei, 2013. "Performance shocks and misreporting," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 57-72.
    2. Bouwman, Christa H.S., 2014. "Managerial optimism and earnings smoothing," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 283-303.
    3. Armstrong, Christopher S. & Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2013. "The relation between equity incentives and misreporting: The role of risk-taking incentives," Journal of Financial Economics, Elsevier, vol. 109(2), pages 327-350.
    4. Pikulina, E.S. & Renneboog, L.D.R. & Horst, J.R. ter & Tobler, P.N., 2013. "Overconfidence, Effort, and Investment," Discussion Paper 2013-035, Tilburg University, Center for Economic Research.
    5. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    6. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 5.

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