Managerial Overconfidence and the Use of Level 3 Estimates Evidence from the Banking Industry

40 Pages Posted: 11 Dec 2014 Last revised: 29 Sep 2015

See all articles by Jan Riepe

Jan Riepe

University of Tuebingen - Department of Banking

Date Written: September 26, 2015

Abstract

This project explores the link between managerial overconfidence and banks’ asset valuation behavior in the aftermath of the 2007 financial crisis. Using intra-bank variations, it provides empirical evidence that banks with overconfident CFOs rely more heavily on valuation models designed for inactive markets only, known as Level 3 fair value estimates. More external governance and more experienced auditors mitigate the effect, pointing toward an inappropriate use of those models by overconfident managers. Endogenous manager selection as a reaction to illiquid markets, as well as signaling or the use of private information do not drive the results. Overall, the paper provides a new channel through which managerial overconfidence impacts firm reporting behavior.

Keywords: Managerial Overconfidence, Fair Value, SFAS 157, Mark-to-Model, Corporate Governance

JEL Classification: G14, G21, G34, M41

Suggested Citation

Riepe, Jan, Managerial Overconfidence and the Use of Level 3 Estimates Evidence from the Banking Industry (September 26, 2015). Available at SSRN: https://ssrn.com/abstract=2536355 or http://dx.doi.org/10.2139/ssrn.2536355

Jan Riepe (Contact Author)

University of Tuebingen - Department of Banking ( email )

Nauklerstr. 47
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

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