This study explores the relationship between overconfident Chief Financial Officers (CFOs) and earnings management. Through the lens of upper echelons and overconfidence theories, and using a large sample of 14,156 observations of US firms from 1999 to 2021 inclusive, our study finds that overconfident CFOs are positively associated with earnings management. We show that overconfident CFOs use earnings management to reduce earnings volatility, given that a smooth performance can release their financing pressure. In doing this, we rule out another possible explanation of overconfident CFOs engaging in earnings management to pursue high compensation. Our findings pass a series of robustness tests, including entropy balancing, the Difference-in-Differences test based on the propensity score matching sample (PSM-DID), and alternative measures of main variables. Our study provides a new determinant of earnings management that has more explanatory power than CFO demographic traits – i.e. CFO cognitive biases. Our findings nonetheless show the “bright” side of CFO overconfidence, helping investors, regulators, and policymakers understand overconfident CFOs’ financial reporting decisions.

Originated from

Lu Qiao, Emmanuel Adegbite & Tam Huy Nguyen (2023). Chief Financial Officer Overconfidence and Earnings Management. Accounting Forum, 1-25.

https://www.tandfonline.com/doi/full/10.1080/01559982.2023.2196045

AUTHOR FROM VNU UNIVERSITY OF ECONOMICS AND BUSINESS

Dr. Nguyen Huy Tam is a lecturer in the Faculty of Accounting and Auditing, VNU University of Economics and Business. At the same time, he is also a lecturer at Business School - University of Nottingham (UK). His research interests include accounting, auditing and finance.