The effect of managerial overconfidence on the conditional conservatism and real earnings management

Abstract

Purpose This study aims to investigate the effects of managerial overconfidence on conditional conservatism and real earnings management among companies listed on the Tehran Stock Exchange (TSE). Design/methodology/approach In this paper, the authors used the model of Ball and Shivakumar (2006) for measuring the effect of moderating overconfident management on conditional conservatism in accounting; moreover, the model of Roychowdhury (2006) is used for evaluating the relationship between managerial overconfidence and real earnings management. The study population consists of 1,144 observations and 143 firms listed on TSE over an eight-year period between 2008 and 2015. The statistical model used in this paper is a multivariate regression model; besides, the statistical technique used to test the hypotheses is panel data. Findings Consistent with the expectations, the results showed that there is a negative relationship between managerial overconfidence and conditional conservatism. Furthermore, the findings suggest that managerial overconfidence is negatively connected with real earnings management. This implies that when Iranian managers have many financial problems, they do not engage in real earnings management, as the real earnings management does not increase the value of the companies in the long run and even it cause damage to them. Originality/value This is one of the most important research that simultaneously surveys the impact of managerial overconfidence on conditional conservatism and real earnings management in a developing market called Iran. What really sets this study apart from other papers is that most Iranian firms between 2008 and 2015 because of economic sanctions faced severe financial problems. From this perspective, this study contributes to the research literature by expanding the knowledge of conservatism in the emerging economies.

Impacts of Managerial Overconfidence and Agency Costs on Cash Holdings Within Blockchain Firms

“…Therefore, they are likely to delay recognition of losses and useless the conditional conservatism in accounting. Salehi et al [37] find a negative relationship between managerial overconfidence and conditional conservatism. Overconfident managers tend to invest with internal funds, in which operating cash flow has higher priority and is likely to be exhausted rapidly.…”

Earnings Management, Related Party Transactions and Corporate Performance: The Moderating Role of Internal Control

“…Since financial statements inform owners, creditors, and other users about the economic condition of a company, they can be used as a tool to measure a company's performance, particularly in evaluating the managers (Bergstresser and Philippon 2006). However, executives often distort profits to mislead their stakeholders about the company's real economic performance (Huang and Ho 2020;Salehi et al 2020). Trueman and Titman (1988) argue that since managers think that investors pay more for a firm with a smoother income stream, they often engage in income smoothing, taking actions to dampen fluctuations in their firms' publicly reported net income.…”

“…What is worth mentioning is that the Iranian market has faced the most severe economic sanctions during recent years. Since the majority of Iranian companies are at risk of bankruptcy, many investors cannot be optimistic about investing in these companies or creditors, and bankers rarely lend to them (Salehi et al 2018a(Salehi et al , 2020Moradi et al 2021). In such catastrophic conditions, managers try to provide good information to the capital market by manipulating accounts so they can absorb more investors (Izadinia et al 2015).…”

“…To improve financial reporting, directors are allowed to exercise judgment in adopting reporting methods that match the firm's economics; however, this generates opportunities for them to manipulate profits. Managers try to take conscious steps in the range of generally accepted accounting principles (GAAP) to close the reported profits to the desired profit level (Salehi et al 2020). Given that financial statements reflect corporate performance along with managerial competence, managers are likely to participate in distorting earnings within the regulatory framework to insinuate that they are good managers (Hassan and Ahmed 2012).…”

“…As for Iran's market, it can be said that Iran has faced the worst of severe economic sanctions over the past decade, causing many of its companies to struggle with unbelievable financial problems (Salehi et al 2020;Moradi et al 2021). Given that lenders and investors cannot simply trust such companies with a high risk of collapse, firms are expected to show a beautiful picture of their financial situation so that they can gain better financial resources and attract more investors (Moradi et al 2021).…”