Does Managerial Sentiment Affect Accrual Estimates? Evidence from the Banking Industry

50 Pages Posted: 8 Dec 2014

See all articles by Paul Hribar

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Sam Melessa

University of Iowa - Department of Accounting

R. Christopher Small

University of Toronto - Rotman School of Management

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Date Written: November 2014

Abstract

Defining managerial sentiment as managers’ beliefs about future firm outcomes that are unjustified by the information available to them, we hypothesize and find that managerial sentiment is associated with unintentional errors in accrual estimates. Using a sample of public banks, we find that: (1) managerial sentiment is negatively associated with loan loss provision estimates; (2) loan loss provision estimates made in periods of higher (lower) sentiment are associated with more (less) future charge-offs; and (3) the effects of sentiment are greater for firms with more “uncertain” or more “difficult-to-predict” charge-offs. We find the same results using a sample of private banks, suggesting that the bias in the provision estimates is unintentional, as opposed to strategic. These results are robust to firm-level determinants of loan loss provisions, macroeconomic variables found to affect either loan loss provisions or measures of sentiment, and multiple proxies for managerial sentiment. We contribute to the literature by documenting evidence on how unintentional biases linked with managerial sentiment influence financial reporting decisions.

Keywords: Sentiment, earnings quality, accruals, loan loss provisions, banking industry

JEL Classification: G21, G28, M41

Suggested Citation

Hribar, Paul and Melessa, Sam and Small, R. Christopher and Wilde, Jaron H., Does Managerial Sentiment Affect Accrual Estimates? Evidence from the Banking Industry (November 2014). Available at SSRN: https://ssrn.com/abstract=2535008 or http://dx.doi.org/10.2139/ssrn.2535008

Paul Hribar (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Sam Melessa

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

R. Christopher Small

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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