Managerial Overconfidence, Compensation Induced Risk Taking, and Earnings Management

The International Journal of Business and Finance Research, v. 12 (2) p. 1-26

26 Pages Posted: 25 Feb 2019

See all articles by Chun An Li

Chun An Li

National Yunlin University of Science and Technology

Tse-Mao Lin

National Yunlin University of Science and Technology

Yu Wen Huang

National Yunlin University of Science and Technology

Date Written: 2018

Abstract

This study examined Taiwanese listed company and OTC (Over-the-Counter) firms to explore empirically managerial overconfidence and compensation incentives induced risk-taking, and the impact on accrualbased earnings management (AEM) and real earnings management (REM). The study results show that overconfident managers are more likely to adopt REM than AEM. Compensation induced Delta risk-taking is irrelevant to AEM but could lower the propensity for REM, and compensation induced Vega risk-taking could increase the magnitude of AEM but lower the magnitude of REM. These results remain robust after including interaction dummy between overconfidence and Delta risk-taking, and interaction dummy between overconfidence and Vega risk-taking for further analysis and Logistic Regression. In addition, this study also finds that overconfidence could mitigate the positive relationship between Vega risk-taking and AEM.

Keywords: Risk-Taking, Earnings Management, Overconfidence, Compensation Incentive

JEL Classification: G34, G41

Suggested Citation

Li, Chun An and Lin, Tse-Mao and Huang, Yu Wen, Managerial Overconfidence, Compensation Induced Risk Taking, and Earnings Management (2018). The International Journal of Business and Finance Research, v. 12 (2) p. 1-26, Available at SSRN: https://ssrn.com/abstract=3241650

Chun An Li (Contact Author)

National Yunlin University of Science and Technology ( email )

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

Tse-Mao Lin

National Yunlin University of Science and Technology ( email )

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

Yu Wen Huang

National Yunlin University of Science and Technology

123, University Rd. Sec 3
Touliu, Youlin 640, Yunlin 64002
Taiwan

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