Research On The Transmission Mechanism Of Managerial Overconfidence In The Control Process Of Earnings Reporting

Listed companies are the cornerstone of the capital market. A good earningsreporting is necessary for these companies to understand their true financialstatement, achieve efficient resource allocation and build a good investmentenvironment. Top managers of these companies, who are always decision makersand implementers, often have huge executive powers. The accountingprofessional judgment rights, which is authorized by the accounting standards tothe enterprise, may be misused by the top managers with judgment rights throughimplementing earnings management and controlling earnings reporting level, inorder to achieve the anticipate earnings target, mislead the stakeholders aboutthe true profit status or just satisfy the demand of contracts based on financialreporting. All the actions above may do harm to the stability of accountinginformation in a great extent. Accordingly, the control process of earnings reportlevel is usually along with certain economic consequences and risks.Unlike the simple hypothesis made by the previous studies that topmanagers are rational economic people, the researches of this thesis introduce thenotion of overconfident managers to construct a theoretical model that reveal thedegree of the external overconfidence impacting on the control process ofearnings reporting level. The experimental results confirmed the accuracy of themodel. Furthermore, the results also manifested that it is individualoverconfidence that leads to the external overconfidence, and reveal theunderlying transmission mechanism of how overconfidence managers influencethe control process of earnings reporting level. Besides, this thesis further doresearches on the preferences of control earnings reporting level underoverconfidence circumstance, and the relationship between control level andinvolvement of institutional investors. The specific contents are as follows:Firstly, we explained the regulatory mechanism of overconfidenceimpacting on the control process of earnings reporting. By given clear definitionsof overconfidence managers and the control process of earnings reporting, weanalyzed the related bonded rational theory, control illusion and upper echelonstheory. Based on the above theories, for the question that whether overconfidencemanagers are totally rational during the control process of earnings reporting, wegot the answer no through experiment. Consequently, we confirmed the necessityof introducing the notion of overconfidence managers into the research, as toconstruct the theoretical framework of overconfidence managers transmission mechanism.Secondly, we constructed static analysis model of the control process ofearnings reporting level when top managers are overconfident. We definemanagers’ external overconfidence as their anticipation about the external marketenvironment and future. Then we constructed a theoretical model that reveal howthe external overconfidence impacting on the control process of earningsreporting level, which revealed the game between investors and managers duringthis process. By the static analyzing model, we validated that managersinfluenced by the external overconfidence, always overestimated the incentiveeffect of manipulate earnings reporting and underestimated the punitive effect ofearnings reporting that out of control. As a result, they are prone to chooseradical earnings management along with relax control on the earnings reportinglevel. In conclusion, intensifying supervision and punishment only by theaccounting standards and relative norm into account will stimulate top managersto cheat on the earnings statement instead of reporting earnings honestly.Thirdly, we verified the conclusion of static analyzing model and disclosedthe reason that leads top managers to external overconfidence. Using companiesthat involved in earnings report violation as the research object, throughanalyzing the specific cased and do empirical research, we found that seventypercent companies did not have the situation of earnings reporting out of control.However, under the effect of external overconfidence, they fluctuated slightly onthe earnings reporting level, and gradually slipped into the pitfall of deliberateviolation. Based on the analysis above, we test monitor mechanism and topmanagers’ characters for the reason that why these70%companies out of controlin earnings report process. And the conclusion is that it is the individualoverconfidence of top managers that result in the their external overconfidenceand deliberate violation on earnings reporting. Furthermore, by doing regressionanalysis on the big sample of the industry, we confirmed convincing conclusionof the transmission mechanism of managerial overconfidence from the individualto external.Lastly, we focused on the role that the institutional investors played in therelationship between overconfidence managers and the control process ofearnings reporting level. The experimental results manifested that institutionalinvestors influenced by the overconfidence managers when they perform the roleof supervision and restraint on the control process of earnings reporting level.Under the situation of overconfidence managers, investors’ supervision oncontrol of violation was limited, and even deteriorates the rate and degree of earnings management by top managers, thus increases the probability of earningsreporting out of control.The research will be helpful for supervisors and investors in the capitalmarket to realize the influence of top managers’ bonded ration in the controlprocess of earnings reporting. In that case, they could consider the top managers’bonded ration during their decision in making monitor rules and investment. Itoffers them guidance both in theory and practice. That would be useful forresources allocation and market development.