Executive Overconfidence and the Slippery Slope to Financial Misreporting

49 Pages Posted: 31 Aug 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: August 30, 2011

Abstract

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.

Keywords: executive overconfidence, fraud, earnings management, 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 (August 30, 2011). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1919729

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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