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Chief financial officer overconfidence and earnings management

Chief financial officer overconfidence and earnings management 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting Forum Taylor & Francis

Chief financial officer overconfidence and earnings management

Qiao, Lu; Adegbite, Emmanuel; Nguyen, Tam Huy
Accounting Forum , Volume OnlineFirst: 25 – Apr 12, 2023
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References (81)

Publisher
Taylor & Francis
Copyright
© 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
ISSN
1467-6303
eISSN
0155-9982
DOI
10.1080/01559982.2023.2196045
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Accounting Forum – Taylor & Francis

Published: Apr 12, 2023

Keywords: CFO overconfidence; earnings management; overconfidence theory; upper echelons theory

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