Multiple measurements of CEOs’ overconfidence and future earnings management: evidence from Asia-Pacific developing countries

Abstract

AbstractThis study investigates the association between CEOs’ overconfidence and future earnings management. This research is designed to explain CEOs’ overconfidence with the serial logic of self-confidence and self-identity in constructing their overconfidence. The authors demonstrate the CEOs’ overconfidence using multiple measures exploratorily that criticise their behaviour to manage their firms’ earnings aggressively. The authors collected data from the Bureau Van Dijk and Refinitiv Thomson Reuters databases. They identified manufacturing firms listed on the stock exchanges of Singapore (SSE), Malaysia (KLSE), Thailand (SET), the Philippines (PSE), Indonesia (IDX), Vietnam (HOSE), Pakistan (PSE); Taiwan (TSEC); India (NSE) and China (SSE). They categorised developing countries as lower-middle and upper-middle-income. This study used Generalised Least-Square (GLS) regression to test all the hypotheses. This study finds this association robust in an international setting for developing countries. In other words, it shows some extant research that most CEOs in developing countries would intentionally like to manage future earnings. Furthermore, it identifies developing countries with lower-middle incomes and less competition due to emerging capital markets. Then, it highlights that CEOs in developing countries tend to be overconfident because of cognitive behaviour. Moreover, these CEOs assemble an organisational culture that can easily improve prospective performance. Therefore, this study infers that economic uncertainty causes CEOs to be overconfident, enhancing their boldness when managing earnings excessively. This study presents a novelty supported by three critical reasoning arguments. First, it explains the phenomenon of CEOs’ overconfidence through self-confidence (self-control). Second, the authors develop multiple measurements used in the study to mark the CEOs’ overconfidence as a combined product of self-confidence and self-identity. It uses capital expenditures to measure the CEOs’ overconfidence and firm overinvestment, the incremental debt-to-equity ratio, historical earnings persistence, historical stock price persistence, the magnitude of the related party’s transactions and political connections. Third, this study investigates CEOs’ overconfidence in an international setting.