Managerial Overconfidence and Tone of Management Reports

محورهای موضوعی : Financial Accounting

Kefsan Mansouri ¹ , Abbas Aflatooni ² , Hassan Zalaghi ³

1 - Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamadan, Iran
2 - Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamadan, Iran
3 - Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamadan, Iran

تاریخ دریافت : 1402/07/06 تاریخ پذیرش : 1403/02/04 تاریخ انتشار : 1403/03/06

کلید واژه: Managerial Overconfidence , Management Report, Positive Tone , Negative Tone ,

چکیده مقاله :

The purpose of this study was to investigate the effect of managerial overconfidence as a behavioral bias on the tone of management reports, including directors’ report and management discussion and analysis (MD&A). In this research, the frequency of technical words was used to measure the tone of the management report, and overinvestment was used as a proxy for managerial overconfidence. The hypotheses were tested on 134 companies over a 4-year period from 2017 to 2020, using multivariate regression models in STATA. The results show that managerial overconfidence is not significantly associated with the positive tone of management reports, but is positively associated with the negative tone of these reports. The results suggest that, due to the uncertainties and risks in the economic environment of Iran and their escalation within the time frame of the present research, overconfident managers tend to use a more negative tone when reporting on risks and uncertainties to avoid the negative consequences of overstatement.

چکیده انگلیسی:

The purpose of this study was to investigate the effect of managerial overconfidence as a behavioral bias on the tone of management reports, including directors’ report and management discussion and analysis (MD&A). In this research, the frequency of technical words was used to measure the tone of the management report, and overinvestment was used as a proxy for managerial overconfidence. The hypotheses were tested on 134 companies over a 4-year period from 2017 to 2020, using multivariate regression models in STATA. The results show that managerial overconfidence is not significantly associated with the positive tone of management reports, but is positively associated with the negative tone of these reports. The results suggest that, due to the uncertainties and risks in the economic environment of Iran and their escalation within the time frame of the present research, overconfident managers tend to use a more negative tone when reporting on risks and uncertainties to avoid the negative consequences of overstatement.

منابع و مأخذ:

[1] Abbasi, E., Vakilifard, H., Marouf, M., The effect of managerial overconfidence on the quality of financial reporting and conditional conservatism in the Tehran Stock Exchange, Journal of Management Accounting and Auditing Knowledge, 2018; 7(25): 193-206. (in Persian).
[2] Aflatooni, A., Statistical Analysis in Accounting and Finance Using Stata, Tehran Publications, 2016, 1st Edition (in Persian).
[3] Ahmed, A. S., Duellman, S., Managerial overconfidence and accounting conservatism,Journal of Accounting Research, 2013; 51(1): 1-30. Doi: 10.1111/j.1475-679X.2012.00467.
[4] Akbarlou, E., Zeynali, M., Alinezhad Sarokolaei, M., Baradaran Hassan Zadeh, R., Investigating the relationship between managers' narcissism and the optimistic tone of financial reporting: The moderating role of earnings management, Empirical Studies in Financial Accounting, 2021; 18(72): 169-192. doi: 10.22054/qjma.2021.59285.2237 (In Persian).
[5] Alicke, M. D., Klotz, M. L., Breitenbecher, D. L., Yurak, T. J., Vredenburg, D. S., Personal contact, individuation, and the better-than-average effect, Journal of Personality and Social Psychology, 1995; 68(5): 804–825. Doi: 10.1037/0022-3514.68.5.804
[6] Alloy, L. B., Abramson, L. Y., Judgment of contingency in depressed and nondepressed students: Sadder but wiser? Journal of Experimental Psychology: General, 1979;108(4): 441-452. Doi: 10.1037/0096-3445.108.4.441
[7] Bashirimanesh, N., Ourojoghli, N., The effect of managers' overconfidence on financial reporting tone, Financial and Behavioral Research in Accounting, 2021; 1(2): 81-99. Doi: 10.30486/FBRA.2021.1941754.1035 (In Persian).
[8] Beattie, V., Thomson, S. J., Lifting the lid on the use of content analysis to investigate intellectual capital disclosures, in: Accounting Forum, 2007;31(2): 129-163. Doi: 10.1016/j.accfor.2007.02.001
[9] Hargrave, M., Management discussion and analysis (MD&A): Definition and example. https://www.investopedia.com/terms/m/mdanalysis.asp. Updated August 29, 2023.
[10] Bradley, G. W., Self-serving biases in the attribution process: A reexamination of the fact or fiction question. Journal of Personality and Social Psychology, 1978;36(1): 56-71. Doi: 10.1037/0022-3514.36.1.56
[11] Brockett, A., Rezaee, Z., Sustainability reporting’s role in managing climate change risks and opportunities, in: Managing Climate Change Business Risks and Consequences: Leadership for Global Sustainability, New York: Palgrave Macmillan US, 2012; Doi: 10.1057/9781137011435_7
[12] Cho, C. H., Roberts, R. W., Patten, D. M., The language of US corporate environmental disclosure, Accounting, Organizations and Society, 2010; 35(4): 431-443. Doi: 10.1016/j.aos.2009.10.002
[13] Clarke, G., Messages from CEOs: A content analysis approach. Corporate Communications: An International Journal, 1997;2(1): 31-39. Doi:10.1108/eb046532
[14] Clarkson, P. M., Kao, J. L., Richardson, G. D., Evidence that management discussion and analysis (MD&A) is a part of a firm's overall disclosure package, Contemporary Accounting Research, 1999; 16(1): 111-134. Doi: 10.1111/j.1911-3846.1999.tb00576
[15] Dastgir, M., Miraki, F., Kazemi Noori, S., The impact of top executives overconfidence on financial distress, Journal of Iranian Accounting Review, 2014;1(2): 37-51. (In Persian).
[16] Davis, A. K., Tama‐Sweet, I., Managers’ use of language across alternative disclosure outlets: earnings press releases versus MD&A, Contemporary Accounting Research, 2012; 29(3): 804-837. Doi: 10.1111/j.1911-3846.2011.01125
[17] Davis, A. K., Piger, J. M., Sedor, L. M., Beyond the numbers: An analysis of optimistic and pessimistic language in earnings press releases (Vol. 5), St. Louis, MO: Federal Reserve Bank of St. Louis, 2006.
[18] Gomariz, M. F. C., Ballesta, J. P. S., Financial reporting quality, debt maturity and investment efficiency, Journal of Banking and Finance, 2014;40: 494-506. Doi: 10.1016/j.jbankfin.2013.07.013
[19] Gong, R., CEO overconfidence and the tone of press release. Accounting & Finance, 2023; 63(2): 2081-2108. Doi: 10.1111/acfi.12950
[20] Guillamon-Saorin, E., Osma, B. G., Jones, M. J., Opportunistic disclosure in press release headlines, Accounting and Business Research, 2012; 42(2): 143-168. Doi: 10.1080/00014788.2012.632575
[21] Harris, P., Sufficient grounds for optimism? The relationship between perceived controllability and optimistic bias, Journal of Social and Clinical Psychology, 1996;15(1): 9–52. Doi: 10.1521/jscp.1996.15.1.9
[22] Heider, F. (1958). The Psychology of Interpersonal Relations. New York: Wiley.
[23] Heider, F., A conversation with Fritz Heider, 1976, in: I. H., Harvey, W., Ickes, R. F. Kidd, (Eds.), New Directions in Attribution Research, 1(1): 3-18. Hillsdale, NJ: Erlbaum.
[24] Henry, E., Leone, A. J., Measuring qualitative information in capital markets research: Comparison of alternative methodologies to measure disclosure tone, The Accounting Review, 2016; 91(1): 153-178. Doi: 10.2308/accr-51161
[25] Hribar, P., Yang, H., CEO overconfidence, managerial earnings forecasts, and earnings management, Working Paper, University of Iowa and Cornell University, 2011.
[26] Hribar, P., Yang, H., CEO overconfidence and management forecasting, Contemporary Accounting Research, 2016; 33(1): 204-227. Doi: 10.1111/1911-3846.12144
[27] Huang, X., Teoh, S. H., Zhang, Y., Tone management. The Accounting Review, 2014, 89(3): 1083-1113. Doi: 10.2139/ssrn.2024674
[28] Hussain, S., CEO Overconfidence and tone of annual report, Doctoral Dissertation, Master Thesis, Saskatoon: University of Saskatchewan. 2019.
[29] Jegadeesh, N., Wu, D., Word power: A new approach for content analysis, Journal of Financial Economics, 2013; 110(3): 712-729. Doi: 10.1016/j.jfineco.2013.08.018
[30] Kahveci, E., The tone of annual reports as a strategic performance management tool: Application on Turkey’s Borsa Istanbul corporate governance index firms, Journal of Economics Finance and Accounting, 2016;3(3): 209-221. Doi: 10.17261/Pressacademia.2016321989
[31] Kamyabi, Y., Rastaghi, B. M. M., Cash holding, adjustment speed, and financial leverage in companies listed on the Tehran Stock Exchange, Accounting and Auditing Research, 2010; 12(48): 61-78. (In Persian).
[32] Kashanipour, M., Mohamadi, M., Investigating the relationship between managerial overconfidence, cash holdings, and cash-flow sensitivity, Financial Accounting Research, 2017; 9(3): 17-32. Doi: 10.22108/FAR.2018.104875.1113 (in Persian).
[33] Kelley, H. H., Attribution theory in social psychology, Nebraska Symposium on Motivation, 1967;15: 192–238.
[34] Kelley, H. H., The processes of causal attribution, American Psychologist, 1973; 28(2): 107. Doi: 10.1037/h0034225
[35] Khajavi, S., Dehghani Sa'di, A., Gerami Shirazi, F., CEO narcissism impacts on earnings management and financial performance, Journal of Accounting Advances, 2017; 8(2): 123-149. (In Persian). Doi: 10.22099/JAA.2017.4052
[36] Koenig, L. J., Clements, C. M., Alloy, L. B., Depression and the illusion of control: The role of esteem maintenance and impression management. Canadian Journal of Behavioural Science, 1992;24(2): 233–252. Doi: 10.1037/h0078706
[37] Langer, E. J., The illusion of control. Journal of Personality and Social Psychology, 1975; 32(2): 311-328. Doi: 10.1037/0022-3514.32.2.311
[38] Langer, E. J., Roth, J., Heads I win, tails it's chance: The illusion of control as a function of the sequence of outcomes in a purely chance task, Journal of Personality and Social Psychology, 1975; 32(6): 951-602. Doi: 10.1037/0022-3514.32.6.951
[39] Li, S., Wang, G., Luo, Y., Tone of Language, Financial Disclosure, and Earnings Management: A Textual Analysis of Form 20-F, Financial Innovation, 2022;8(1): 43. Doi:10.1186/s40854-022-00346-5
[40] Loughran, T., McDonald, B., Textual analysis in accounting and finance: A survey, Journal of Accounting Research, 2016; 54(4): 1187-1230. Doi: 10.1111/1475-679X.12123
[41] Mai, F., Tian, S., Lee, C., Ma, L., Deep Learning models for bankruptcy prediction using textual disclosures, European Journal of Operational Research, 2019; 274(2): 743-758. Doi: 10.1016/j.ejor.2018.10.024
[42] Malmendier, U., Tate, G., CEO overconfidence and corporate investment, The Journal of Finance, 2005; 60(6): 2661-2700. Doi: 10.1111/j.1540-6261.2005.00813
[43] Malmendier, U., Tate, G., Yan, J., Overconfidence and early-life experiences: The effect of managerial traits on corporate financial policies, The Journal of Finance, 2011; 66(5): 1687-1733. Doi:10.1111/j.1540-6261.2011.01685
[44] March, J. G., Shapira, Z., Managerial Perspectives on Risk and Risk Taking, Management Science, 1987;33(11): 1404-1418. Doi: 10.1287/mnsc.33.11.1404
[45] Martikainen, M., Miihkinen, A., Watson, L. ,Board characteristics and negative disclosure tone. Journal of Accounting Literature, 2022; 45(1): 100-129. Doi: 10.1108/JAL-03-2022-0033
[46] Mehrabi, A., What is the interpretative report of the board of directors and what information does it contain? 2022. (In Persian).
[47] Merrienboer, G., The impact of CEO overconfidence on managerial financial reporting, Erasmus Universiteit Rotterdam, 2016;1-41.
[48] Miller, D. T., Ross, M., Self-serving biases in the attribution of causality: Fact or fiction? Psychological Bulletin, 1975; 82(2): 213-225. Doi: 10.1037/h0076486
[49] Moore, D. A. Cain, D. M., Overconfidence and underconfidence: When and why people underestimate (and overestimate) the competition, Organizational Behavior and Human Decision Processes, 2007; 103: 197-213. Doi: 10.1016/j.obhdp.2006.09.002
[50] Osma, B. G., Grande-Herrera, C., Saorin, E. G., Optimistic disclosure tone and CEO career concerns, Available at SSRN, 2018. Doi: 10.2139/ssrn.3160100
[51] Peleh, M., Izadinia, N., Amiri, H., The effect of tone in board's activity reports on future performance based on signaling and opportunistic approach. Journal of Value & Behavioral Accounting, 2020; 4(8): 1-31. Doi: 10.29252/aapc.4.8.1 (In Persian).
[52] Rahnamay Roodposhti, F., Nikoomaram, H., Nonahal Nahr, A. A., Evaluating the effects of language judgmental and cognitive approaches in accounting narratives, Accounting and Auditing Review, 2012; 19(2): 47-72. Doi: 10.22059/ACCTGREV.2012.29199 (In Persian).
[53] Riemer, B. S., Influence of causal beliefs on affect and expectancy, Journal of Personality and Social Psychology, 1975;31(6): 1163-1171. Doi: 10.1037/h0077103
[54] Rezazadeh, J., Mohammadi, M., Azimi, E., Investigating the effect of managers' overconfidence on internal control weaknesses in companies listed on the Tehran Stock Exchange, Journal of Research in Management and Accounting, 2017;24: 221-233. (In Persian).
[55] Schrand, C. M., Zechman, S. L., Executive overconfidence and the slippery slope to financial misreporting, Journal of Accounting and Economics, 2012; 53(1-2): 311-329. Doi: 10.1016/j.jacceco.2011.09.001
[56] Spence, M., Job market signaling, The Quarterly Journal of Economics, 1973; 87(3): 355-374. Doi: 10.2307/1882010.
[57] Starliper, M., The impact of tone management on investor judgments: Evidence from ICFR reports, Accounting Research Journal, 2023; 36(1): 77-91. Doi: 10.1108/ARJ-06-2021-0179
[58] Thompson, S. C., Armstrong, W., Thomas, C., Illusions of control, underestimations, and accuracy: a control heuristic explanation, Psychological Bulletin, 1998; 123(2): 143-161. Doi: 10.1037/0033-2909.123.2.143
[59] Verrecchia, R. E., Essays on Disclosure, Journal of Accounting and Economics, 2001; 32(1-3): 97-180. Doi: 10.1016/S0165-4101(01)00025-8
[60] Wang, Q., Wu, D., Yan, L., Effect of Positive Tone in MD&A Disclosure on capital structure adjustment speed: Evidence from China, Accounting & Finance, 2021; 61(4): 5809-5845. Doi: 10.1111/acfi.12777
[61] Weiner, B., Frieze, I., Kukla, A., Reed, L., Rest, S., Rosenbaum, R. M., Perceiving the causes of success and failure, 1987, In E. E. Jones, D. E. Kanouse, H. H. Kelley, R. E. Nisbett, S. Valins, & B. Weiner (Eds.), Attribution: Perceiving the causes of behavior (pp. 95–120). Lawrence Erlbaum Associates, Inc.
[62] Weiner, B., Nierenberg, R., Goldstein, M., Social learning (locus of control) versus attributional (causal stability) interpretations of expectancy of success, Journal of Personality, 1976; 44(1): 52–68. Doi: 10.1111/j.1467-6494.1976.tb00583.x
[63] Wisniewski, T. P., Yekini, L., Predicting stock market returns based on the content of annual report narrative: A new anomaly, Available at SSRN, 2014. Doi: 10.2139/ssrn.2474061
[64] Wu, D. X., Yao, X., Guo, J. L., Is Textual tone informative or inflated for firm’s future value? Evidence from chinese listed firms, Economic Modelling, 2021; 94: 513-525. Doi: 10.1016/j.econmod.2020.02.027
[65] Zakeri, J., Filsaraei, M., The effect of audit committee and board committee on the tone of financial reporting, Quarterly Journal of Contemporary Research in Management and Accounting, 2020; 2(6): 77-100. (In Persian).