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CEO Overconfidence and Earnings Management During Shifting Regulatory Regimes

Journal of business finance & accounting, 2014-11, Vol.41 (9-10), p.1243-1268 [Peer Reviewed Journal]

2014 John Wiley & Sons Ltd ;Copyright Blackwell Publishing Ltd. Nov-Dec 2014 ;ISSN: 0306-686X ;EISSN: 1468-5957 ;DOI: 10.1111/jbfa.12089

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  • Title:
    CEO Overconfidence and Earnings Management During Shifting Regulatory Regimes
  • Author: Hsieh, Tien-Shih ; Bedard, Jean C. ; Johnstone, Karla M.
  • Subjects: Accruals ; CEO overconfidence ; Chief executive officers ; Earnings ; Earnings management ; executive compensation ; Expected utility ; Investors ; Management ; Options on stocks ; Public Company Accounting Reform & Investor Protection Act 2002-US ; Sarbanes-Oxley Act ; Stock options ; Studies ; Utility functions
  • Is Part Of: Journal of business finance & accounting, 2014-11, Vol.41 (9-10), p.1243-1268
  • Description: This study examines the relationship of CEO overconfidence with accrual‐based earnings management, real activities‐based earnings management, and targeting to meet or just beat analyst forecasts. Following, we measure “overconfidence” based on the CEO's tendency to hold in‐the‐money stock options, as rational expected utility maximizers should exercise early to avoid overexposure to company idiosyncratic risks. The results show that before the Sarbanes Oxley Act of 2002 (SOX), companies of overconfident CEOs were more likely than other CEOs to engage in managing earnings through accelerating the timing of cash flow from operations and achieving analyst forecast benchmarks. After SOX, we find that overconfident CEOs are more likely to have income‐increasing discretionary accruals. They remain more likely to engage in real activities management through abnormally high cash flows, and also have abnormally low discretionary expenses. These results are consistent with overconfident CEOs feeling less constrained by SOX, and suggest that this individual characteristic works against regulators’ attempts to constrain earnings management by corporate executives. In contrast, we find that the tendency of overconfident CEOs to manage to targets decreases after SOX, perhaps due to changes in investor behavior in the new regulatory environment.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0306-686X
    EISSN: 1468-5957
    DOI: 10.1111/jbfa.12089
  • Source: Alma/SFX Local Collection
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