Managerial Overconfidence, Compensation Induced Risk Taking, and Earnings Management

Abstract

This study examined Taiwanese listed company and OTC (Over-the-Counter) firms to explore empirically managerial overconfidence and compensation incentives induced risk-taking, and the impact on accrualbased earnings management (AEM) and real earnings management (REM). The study results show that overconfident managers are more likely to adopt REM than AEM. Compensation induced Delta risk-taking is irrelevant to AEM but could lower the propensity for REM, and compensation induced Vega risk-taking could increase the magnitude of AEM but lower the magnitude of REM. These results remain robust after including interaction dummy between overconfidence and Delta risk-taking, and interaction dummy between overconfidence and Vega risk-taking for further analysis and Logistic Regression. In addition, this study also finds that overconfidence could mitigate the positive relationship between Vega risk-taking and AEM.

Keywords: Risk-Taking, Earnings Management, Overconfidence, Compensation Incentive

JEL Classification: G34, G41