Executive Overconfidence and the Slippery Slope to Financial Misreporting

47 Pages Posted: 11 Sep 2008 Last revised: 25 Nov 2011

Catherine M. Schrand

University of Pennsylvania - Accounting Department

Sarah L. C. Zechman

University of Colorado at Boulder - Leeds School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2011

Abstract

A detailed analysis of firms subject to SEC Accounting and Auditing Enforcement Releases (AAERs) in the 1990s and 2000s suggests that approximately one-quarter are the result of an act that is consistent with legal standards of intent. In the remaining three quarters, the initial misstatement – generally an overstatement – reflects an optimistic bias that is not necessarily intentional. Because of the bias, in subsequent periods these firms are more likely to be in a position in which they are compelled to manage earnings in growing amounts. Overconfidence is a trait that is associated with optimistic bias. We find results consistent with overconfident executives, who are more likely to exhibit an optimistic bias, being more likely to initially overstate earnings which starts them on the path to growing intentional misstatements.

Keywords: executive overconfidence, fraud, earnings mangement, corporate governance

JEL Classification: G34, M14, M41

Suggested Citation

Schrand, Catherine M. and Zechman, Sarah L. C., Executive Overconfidence and the Slippery Slope to Financial Misreporting (May 1, 2011). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper; Chicago Booth Research Paper No. 08-25. Available at SSRN: https://ssrn.com/abstract=1265631 or http://dx.doi.org/10.2139/ssrn.1265631

Catherine M. Schrand

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6798 (Phone)
215-573-2054 (Fax)

Sarah L. C. Zechman (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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