Post by Sapphire Capital on Jan 22, 2009 7:18:09 GMT 4
Executive Overconfidence and the Slippery Slope to Fraud
Catherine M. Schrand
University of Pennsylvania - Accounting Department
Sarah L. C. Zechman
University of Chicago Booth School of Business
August 30, 2008
AAA 2009 Financial Accounting and Reporting Section (FARS) Paper
Chicago Booth School of Business Research Paper No. 08-25
Abstract:
We propose that executive overconfidence increases the likelihood that a firm commits financial reporting fraud. Given an earnings shortfall a manager is more likely to manage earnings if he believes the shortfall is temporary and the earnings management will be a one-off event that likely will go undetected. If performance does not improve, the manager, faced with reversals of prior-period earnings management and continuing poor performance, may choose the type of egregious misreporting that the SEC prosecutes. This situation is more likely for overconfident managers with unrealistic beliefs about future performance. We find industries that attract overconfident executives have a greater proportion of frauds and that there are two types of frauds: Those perpetrated by moderately overconfident executives who ex post fall down the slippery slope, and those by extremely overconfident executives that commit fraud for opportunistic reasons ex ante. Analysis of individuals supports the existent of these two types.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1317009_code753937.pdf?abstractid=1265631&mirid=1
Catherine M. Schrand
University of Pennsylvania - Accounting Department
Sarah L. C. Zechman
University of Chicago Booth School of Business
August 30, 2008
AAA 2009 Financial Accounting and Reporting Section (FARS) Paper
Chicago Booth School of Business Research Paper No. 08-25
Abstract:
We propose that executive overconfidence increases the likelihood that a firm commits financial reporting fraud. Given an earnings shortfall a manager is more likely to manage earnings if he believes the shortfall is temporary and the earnings management will be a one-off event that likely will go undetected. If performance does not improve, the manager, faced with reversals of prior-period earnings management and continuing poor performance, may choose the type of egregious misreporting that the SEC prosecutes. This situation is more likely for overconfident managers with unrealistic beliefs about future performance. We find industries that attract overconfident executives have a greater proportion of frauds and that there are two types of frauds: Those perpetrated by moderately overconfident executives who ex post fall down the slippery slope, and those by extremely overconfident executives that commit fraud for opportunistic reasons ex ante. Analysis of individuals supports the existent of these two types.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1317009_code753937.pdf?abstractid=1265631&mirid=1