Managerial Overconfidence, Conservative Accounting and Corporate Investment

27 Pages Posted: 6 Jul 2018

See all articles by Keiichi Shima

Keiichi Shima

Mie University - Faculty of Humanities, Law and Economics

Jun-ichi Nakamura

Research Institute of Capital Formation, Development Bank of Japan

Date Written: June 28, 2018

Abstract

This paper examines the link between managerial overconfidence, conservative accounting and investment. Using Japanese firm data, we estimate a q investment model incorporating real options effects. Consistent with prior studies, we find that managerial overconfidence increases investment--cash flow sensitivity. On the other hand, we find mixed results regarding the relationship between managerial overconfidence and real options. We proxy sales growth for investment return growth and find that firms' investment is positively related to sales growth and negatively related to its volatility. We also find that managerial overconfidence increases both positive sensitivity of investment to sales growth and negative sensitivity of investment to sales growth volatility. In addition, we examine whether conservative accounting mitigates agency costs and investment distortions after controlling for the effect of managerial overconfidence on investment. Contrary to prior studies, we find that conservative accounting increases investment--cash flow sensitivity. However, our results confirm that conservative accounting significantly reduces investment--cash flow sensitivity for firms with managerial overconfidence.

Keywords: Overconfidence, Conservative accounting, Investment, Earnings forecast

JEL Classification: G31, G40, M41

Suggested Citation

Shima, Keiichi and Nakamura, Jun-ichi, Managerial Overconfidence, Conservative Accounting and Corporate Investment (June 28, 2018). Available at SSRN: https://ssrn.com/abstract=3203187 or http://dx.doi.org/10.2139/ssrn.3203187

Keiichi Shima (Contact Author)

Mie University - Faculty of Humanities, Law and Economics ( email )

1577 Kurimamachiya-cho
Tsu, Mie 514-8507
Japan

Jun-ichi Nakamura

Research Institute of Capital Formation, Development Bank of Japan ( email )

9-7
Otemachi 1-chome Chiyoda-ku
Tokyo, 100-0004
Japan

HOME PAGE: http://https://www.dbj.jp/ricf/en/

Register to save articles to
your library

Register

Paper statistics

Downloads
122
Abstract Views
1,031
rank
234,463
PlumX Metrics