The effect of managerial overconfidence on the conservatism with respect to the role of external monitoring

Document Type : Research Paper

Authors

1 Associate Prof., Faculty of Management and Economics, Shahid Bahonar University, Kerman, Iran

2 Ph.D Student of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran

3 MSc., Faculty of Administrative Sciences and Economics, Vali-e-Asr University, Rafsanjan, Iran

Abstract

This study investigates the effect of managerial overconfidence on  both conditional and unconditional conservatism considering the role of external monitoring. Data is collected from a sample of 197 firms listed in Tehran Stock Exchange over the period 2004 to 2012. Two measures are used for managerial overconfidence: excess asset growth and debt to equity ratio above the industry median. Unconditional conservatism is measured using an accrual-based measure and the difference between cash flow skewness and earnings skewness (Givoly and Hayn [2000]). Conditional conservatism is measured using Basu’s [1997] asymmetric timeliness measure. The findings indicate that both of managerial overconfidence measures have a significant negative effect on both conditional and unconditional conservatism. In addition, the results indicate that external monitoring significantly mitigates the effect of managerial overconfidence on unconditional conservatism.

Keywords

References

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