Chief executive officer overconfidence and the incidence of financial statement restatement

This study examines the relationship between chief executive officer (CEO) overconfidence and financial statement restatements. Studies that address financial statement restatements have largely ignored the role of CEO characteristics. This paper adds to the literature on restatements by examining whether CEO overconfidence, a trait that has been found to be associated with a variety of key corporate decisions, is related to the incidence of financial statement restatements.;Three separate hypotheses are tested. The first hypothesis (stated in alternative form) examines whether there is a positive relationship between CEO overconfidence and the incidence of financial statement restatements. The second hypothesis (stated in alternative form) examines whether the relationship exists after controlling for factors research suggests contribute to the likelihood of restatement. The third hypothesis (stated in alternative form) examines whether a positive relationship exists between financial statement restatements and CEO overconfidence in both the pre- and post-Sarbanes-Oxley Act period.;The sample used in this study includes annual restatements with restatement announcement dates within the two years ended June 30, 2006. The measure of overconfidence has been used and empirically tested in prior research. A matched pairs approach to the analysis is employed. The sample and control samples were analyzed through univariate statistics and logistic regression.;The results document a significant positive relationship between CEO overconfidence and the incidence of financial statement restatement. After controlling for other variables known to affect restatements, a significant positive relationship between CEO overconfidence and the incidence of financial statement restatement is found. This study includes restatements which are corrections of errors and irregularities initiated in years which predate and postdate the Sarbanes-Oxley Act. The results of this analysis suggest that CEO overconfidence is a factor in the incidence of financial statement restatements in both periods.;Finally, this study provides some publicly-available, measurable indicators of CEO overconfidence that auditors and regulators can utilize as a means of gauging CEO overconfidence and its potential impact on financial reporting decisions. Such factors include relative CEO cash compensation, the presence of family ties and founder status.