Executive Overconfidence and the Slippery Slope to Financial Misreporting
Catherine M. Schrand
University of Pennsylvania - Accounting Department
Sarah L. C. Zechman
University of Chicago - Booth School of Business
August 30, 2011
Journal of Accounting & Economics (JAE), Forthcoming
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.
Number of Pages in PDF File: 49
Keywords: executive overconfidence, fraud, earnings management, corporate governance
JEL Classification: G34, M14, M41
Date posted: August 31, 2011
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