Get Managerial Overconfidence And Accounting Conservatism*

Conservatism accounting is a set of guidelines in bookkeeping. Following the conservative approach, companies can only claim profit when it's fully realized and legally verified. A company should factor in the potential worst-case scenario when making financial forecasts under these guidelines.

Overconfident managers tend to believe that the capital market undervalues their firms' shares, and they prefer to issue debt rather than equity to avoid issuing underpriced securities. If firms are financially constrained in relation to debt financing, they will invest less when internal funds are exhausted.

Search for Multibagger Stocks: Investors with overconfidence bias often tend to believe that they can pick the next big stock. As a result, they often invest in a lot of risky penny stocks. They do some analysis or receive some information about a company which makes them believe that they are special.

Overconfidence bias is the tendency for a person to overestimate their abilities. It may lead a person to think they're a better-than-average driver or an expert investor. Overconfidence bias may lead clients to make risky investments.

Examples of Accounting Conservatism For example, a company that expects to win litigation is obliged to meet all the requirements of revenue recognition before it reports the gains. However, the company must record the economic loss if it expects to lose a lawsuit.

Overconfident managers are defined as managers who overestimate future returns from their firms' investments and systematically overestimate the probability of good performance.

Consistent with the expectations, the results showed that there is a negative relationship between managerial overconfidence and conditional conservatism. Furthermore, the findings suggest that managerial overconfidence is negatively connected with real earnings management.