The effect of managerial overconfidence on the conditional conservatism and real earnings management

Abstract

Purpose

This study aims to investigate the effects of managerial overconfidence on conditional conservatism and real earnings management among companies listed on the Tehran Stock Exchange (TSE).

Design/methodology/approach

In this paper, the authors used the model of Ball and Shivakumar (2006) for measuring the effect of moderating overconfident management on conditional conservatism in accounting; moreover, the model of Roychowdhury (2006) is used for evaluating the relationship between managerial overconfidence and real earnings management. The study population consists of 1,144 observations and 143 firms listed on TSE over an eight-year period between 2008 and 2015. The statistical model used in this paper is a multivariate regression model; besides, the statistical technique used to test the hypotheses is panel data.

Findings

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. This implies that when Iranian managers have many financial problems, they do not engage in real earnings management, as the real earnings management does not increase the value of the companies in the long run and even it cause damage to them.

Originality/value

This is one of the most important research that simultaneously surveys the impact of managerial overconfidence on conditional conservatism and real earnings management in a developing market called Iran. What really sets this study apart from other papers is that most Iranian firms between 2008 and 2015 because of economic sanctions faced severe financial problems. From this perspective, this study contributes to the research literature by expanding the knowledge of conservatism in the emerging economies.

Citation

Salehi, M., Lari DashtBayaz, M., Hassanpour, S. and Tarighi, H. (2020), "The effect of managerial overconfidence on the conditional conservatism and real earnings management", Journal of Islamic Accounting and Business Research, Vol. 11 No. 3, pp. 708-720. https://doi.org/10.1108/JIABR-03-2017-0030