Research Of The Managers Overconfidence’s Effects On Accounting Conservatism Under The Background Of Economic Crisis

Accounting conservatism is one of the most important features of accountinginformation quality. It would not overstate assets and earnings, and not understateliabilities and loss. Scholars almost studied on accounting conservatism fromperspectives of debt covenant, characteristics of board, equity structure, company listingand external auditor etc. in previous research. Traditional research is established on theassumptions that manager in company is “rational-economic man”, but don’t payattention to manager’s psychological factors, one of which is overconfidence. Becauseof manager is in the position of decision making, his decisions would affect company’sstrategic direction and business operations. Managers’ overconfidence is not onlyrelative to his career future, but also the development of company. So, this research hastheoretic and practical significance.Through review and summarize the relevant researches on overconfidence,earnings management and accounting conservatism, we study how overconfidenceaffects company’s liabilities level and earnings management, and finally affectscompany’s accounting conservatism. We analyze empirical data from A stock market in2008~2010, which managers are holding their companies’ stocks and financialcompanies are not included, and get the following conclusion: we analyze the effects toliabilities level from overconfidence, and find that companies were meeting financingdifficulties in the background of financial crisis. Overconfident managers tended todecrease investment, and reduced the demand of fund, which resulted in drop ofliabilities level, especially the current liabilities. Meanwhile, liabilities’ soft constraintfunction descended. Second, we analyze overconfidence’s effects to earningsmanagement and discover that overconfident managers, compared to non-overconfidentmanagers, intended to manage earnings in a greater degree. The liability ratio declinesand earnings management ascends would result in companies’ accounting conservatismdescend. At last, we test the relevance between overconfidence and accountingconservatism, and prove their significant negative correlation.All in all, in the background of financial crisis, compared to non-overconfidentmanagers, overconfident managers were relative to lower liability ratio and greaterdegree earnings management, lead to lower accounting conservatism. These researchresults are help for strengthening corporate governance, improving decision–making mechanism and developing capital market.