Does accounting conservatism mitigate the shortcomings of CEO overconfidence?

Publication Type

Journal Article

Publication Date

11-2017

Abstract

Overconfident CEOs are more willing to initiate investment projects that require experimentation, yet tend to defer responding to the bad news when the project is not performing as planned. Accounting conservatism accelerates the recognition of the bad news and its dissemination to gatekeepers, making it more likely that the CEO will acknowledge the problem earlier and start searching for solutions. Therefore, firms where both characteristics-CEO overconfidence and accounting conservatism-are present should perform better. Our empirical tests confirm this prediction: firms that practice conservative accounting and are run by overconfident CEOs exhibit better cash flow performance. Our results continue to hold in a variety of settings, including market reactions to acquisitions, cash flow downside risk, and analyst following. Further, the joint positive effect of CEO overconfidence and accounting conservatism on firm performance is stronger in high-uncertainty environments and in firms facing less stringent financing constraints, consistent with theoretical predictions.

Keywords

accounting conservatism, overconfidence, performance, real options, exploration

Discipline

Accounting

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

Accounting Review

Volume

92

Issue

6

First Page

77

Last Page

101

ISSN

0001-4826

Identifier

10.2308/accr-51718

Publisher

American Accounting Association

Additional URL

https://doi.org/10.1007/978-981-13-8102-7

This document is currently not available here.

Share

COinS