CFO Overconfidence and Cost Behavior

Journal of Management Accounting Research (http://aaapubs.org/)

44 Pages Posted: 17 Aug 2018 Last revised: 30 Jul 2023

See all articles by Clara Xiaoling Chen

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Julia Nasev

Ludwig-Maximilians-University Munich

Steve Wu

The University of Hong Kong - School of Business

Date Written: February 18, 2021

Abstract

Using a large sample of U.S. firms, we provide evidence of the effect of CFO overconfidence on firms’ resource adjustment decisions. After controlling for CEO overconfidence, we find that CFO overconfidence is positively associated with cost stickiness. In addition, we find that CFO power relative to the CEO increases the positive association between CFO overconfidence and cost stickiness. Our study contributes to our understanding of the important role of CFOs in operational decisions such as resource adjustment decisions. We also extend the literature on cost behavior by highlighting managerial characteristics as an important determinant of resource adjustment decisions. Our study has important practical implications. Unlike resource adjustment decisions driven by agency problems or other incentive-related issues, such decisions driven by managerial overconfidence cannot be addressed with incentive contract designs. More promising ways to mitigate overconfidence-driven resource adjustment decisions include making overconfident managers aware of their potential behavioral biases and challenging their expectations.

Keywords: Managerial characteristics, CFO, overconfidence, cost stickiness, cost behavior

JEL Classification: M41

Suggested Citation

Chen, Clara Xiaoling and Nasev, Julia and Wu, Steve, CFO Overconfidence and Cost Behavior (February 18, 2021). Journal of Management Accounting Research (http://aaapubs.org/), Available at SSRN: https://ssrn.com/abstract=3233106 or http://dx.doi.org/10.2139/ssrn.3233106

Clara Xiaoling Chen (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Julia Nasev

Ludwig-Maximilians-University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, 80539
Germany

Steve Wu

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

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