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Chief financial officer overconfidence and earnings management (1).pdf (2.24 MB)

Chief financial officer overconfidence and earnings management

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posted on 2023-06-15, 13:33 authored by Lu Qiao, Emmanuel Adegbite, Tam Huy Nguyen

This study explores the relationship between overconfident Chief Financial Officers (CFOs) and earnings management. Through the lens of upper echelons and overconfidence theories, and using a large sample of 14,156 observations of US firms from 1999 to 2021 inclusive, our study finds that overconfident CFOs are positively associated with earnings management. We show that overconfident CFOs use earnings management to reduce earnings volatility, given that a smooth performance can release their financing pressure. In doing this, we rule out another possible explanation of overconfident CFOs engaging in earnings management to pursue high compensation. Our findings pass a series of robustness tests, including entropy balancing, the Difference-in-Differences test based on the propensity score matching sample (PSM-DID), and alternative measures of main variables. Our study provides a new determinant of earnings management that has more explanatory power than CFO demographic traits – i.e. CFO cognitive biases. Our findings nonetheless show the “bright” side of CFO overconfidence, helping investors, regulators, and policymakers understand overconfident CFOs’ financial reporting decisions.

History

Author affiliation

School of Business, University of Leicester

Version

  • VoR (Version of Record)

Published in

Accounting Forum

Publisher

Taylor and Francis

issn

0155-9982

eissn

1467-6303

Copyright date

2023

Available date

2023-06-15

Language

en

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