Economic Cycle, Managers Over-Confidence And Earnings Management

As the principal-agent relationship and information asymmetry existing in capital market, manager set the goal of maximizing their own interests as much as possible. Manage profit report to match the level of management expectations, resulting in accounting information distortion, affecting investment and finance decisions from external information users, reducing the capital market allocation efficiency finally, when they disclose the information to public. Therefore, earnings management of listed companies has been heated issues among investors, regulators and accounting standard setters now.Manager overconfidence is an important factor in earnings management behavior Studies have shown that managerial overconfidence has a significant impact on earnings management behavior that overconfident managers are more likely to conduct earnings management. In recent years, some scholars have found that earnings management behavior is subject to macroeconomic environment. That is in a different stage of the economic cycle, manager earnings management will change dramatically. However, fewer scholars study confident psychological on earnings management from a respective of economic cycle in existing literature. Therefore, this paper aims to study how managerial overconfidence effect earnings management in different phases of economic cycle by combining theoretical analysis and empirical analysis.This thesis follows the path, basic theory-theory analysis-empirical analysis. It researches on managerial overconfidence psychological impact on earnings management studies in different stages of the economic cycle. Firstly review literature on theory of earnings management, managerial overconfidence, the economic cycle. Secondly, based on the foundation theory the mutual influence is analyzed. Finally, research hypotheses are put forward and then conducted empirical research for666listed companies in Shanghai and Shenzhen stock exchange from year2002to year2012. The empirical results show that the degree of earnings management is negatively related to economic cycles; In expansionary phase of the economic cycle, management confidence psychological trigger earnings management behavior was not significant, the economic cycle contraction, managers confident psychological exacerbated earnings management behavior.