An Effect Of Managerial Overconfidence On The Accounting Conservatism

The theory of behavioral finance provides a new train of thought to understand abnormalphenomenon which traditional economic theory and financial theory can’t explain.Overconfidence is one of the main theory in behavioral finance research, previous studies hasconfirmed that overconfident managers may have irrational behaviors caused by psychologicaldeviation, even through they are loyalty to shareholders, thus have an effect on enterprises’investment strategy, financing strategy, dividend distribution policy, mergers and acquisitions.Recently, foreign scholars put forward that, managers overconfidence influences enterprises’profit forecast and the generation process of financial report. Accounting conservatism is oneof the important indicators to measure the quality of financial statements. Unconditionalconservatism and condition of conservatism have different causes, thus their economic effectis differ, the optimistic behavior caused by managerial overconfidence psychology may havedifferent effect on unconditional accounting conservatism and conditional accountingconservatism.External regulation can have an effective constraint on managers behavior, the higher theproportion of independent directors, the stronger the independence of the board, thus theyhave a stronger regulatory force. In addition, with the rising of the proportion of institutionalinvestors holding, institutional investors participate in corporate governance profoundly.Therefore, the forces from independent directors regulatory and institutional investorsregulatory constraints the managers irrational behavior in a effectfully way, so as to ease thenegative impact caused by overconfidence.This article focuses on managers’ irrational behaviour, use empirical research methods,selected from2009to2011, Shanghai and Shenzhen’s A shares data as the study sample, totest the impact of the managerial overconfidence on accounting unconditional conservatismand conditional conservatism. Conclude in this article is that managerial overconfidence willnot damage the unconditioned conservatism, but has significant negative effects on theconditional conservatism, the negative effect conduct through investment, financing, mergers and acquisitions, dividend distribution, and financial reporting generation process. Regulationand supervision from independent directors and institutional investors, can effectively reducethe negative effects. Consider the background of week system of protection to investors in ourcountry, it is necessary to constraint managers’ overconfidence decisions by strengtheningexternal regulatory, and improve the accounting conservatism.