Investigating the Effect of Managerial Overconfidence and Accrual-based Earnings Management

Overconfidence can be summarized as unwarranted faith in one’s intuitive reasoning, judgments, and cognitive abilities. Overconfident managers by the belief that they possess special information (that the others do not) overestimate their information integrity and consequently their firms’ future earnings and cash flows, and usually have positive perspective on firm’s future risk and return. The aim of this study is to investigate the impact of managerial overconfidence on accrual-based earnings management in 95 companies listed in Tehran Stock Exchange during the years 2006 to 2014. In this study, in order to measure managerial overconfidence, two criteria based on investment and financial leverage was implemented. The results showed that there is a positive and significant relationship between managerial overconfidence (based on both overinvestment and financial leverage) on accrual-based earnings management.