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Managerial overconfidence and internal control weaknesses: evidence from Iranian firms

Mehdi Safari Gerayli (Department of Accounting, Bandargaz Branch, Islamic Azad University, Bandargaz, Iran)
Mohammadreza Abdoli (Department of Accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran)
Hasan Valiyan (Department of Management, Shahrood Branch, Islamic Azad University, Shahrood, Iran)
Ali Damavandi (Department of Accounting, Bandargaz Branch, Islamic Azad University, Bandargaz, Iran)

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 1 March 2021

Issue publication date: 13 September 2021

609

Abstract

Purpose

The characteristic of managers’ personality is a key factor in their decision-making. One of the most important personality characteristic of managers is overconfidence. Overconfident managers have false trust about their abilities and have a positive view of the firm’s future performance. Thus, the purpose of this study is to investigate the association between managerial overconfidence and internal control weaknesses (ICW) of the firms listed on the Tehran Stock Exchange (TSE).

Design/methodology/approach

Sample includes the 480 firm-year observations from companies listed on the TSE during the years 2013–2017, and the hypothesis is tested using multivariate regression model based on panel data analysis.

Findings

The authors found that managerial overconfidence increases the firms’ ICW. The findings are robust to alternative measure of managerial overconfidence, individual analysis of the research hypothesis for each year and endogeneity concern. Moreover, additional analysis reveals that the positive relationship between managerial overconfidence and ICW is less pronounced in larger firms.

Originality/value

To the best of the authors’ knowledge, this is the first study to analyze the association between managerial overconfidence and ICW in emerging capital markets and, therefore, can contribute to extend the current literature on managerial overconfidence and ICW in developing countries, especially Iran’s emerging capital market.

Keywords

Citation

Safari Gerayli, M., Abdoli, M., Valiyan, H. and Damavandi, A. (2021), "Managerial overconfidence and internal control weaknesses: evidence from Iranian firms", Accounting Research Journal, Vol. 34 No. 5, pp. 475-487. https://doi.org/10.1108/ARJ-02-2020-0043

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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