A Study On The Relationships Between CEO Overconfidence And Corporate Financial Fraud

Luckin Coffee was suspected of financial fraud of 2.2 billion yuan in 2020.The global financial fraud storm has caused huge losses to investors and creditors,triggering extensive thinking in both society and academia.The influence of CEOs on corporate financial fraud has attracted the attention of the academic community.However,after looking into current research,there are still some gaps in how CEO overconfidence affects corporate financial fraud.Based on upper echelons theory and imprinting theory,this paper focuses on the core question of "whether and how CEO overconfidence affects corporate financial fraud".Meanwhile,we are interested in how boundary moderators affect this relationship.To answer those questions,we first construct a theoretical model of the relationship between CEO overconfidence and corporate financial fraud,and further investigate the moderating effect of CEO personal experiences on this relationship.Second,using Python and text analysis,a novel measure of overconfidence is designed from an individual perspective in the Chinese context.Finally,we leverage the panel data of China A-share nonfinancial listed companies from 2008 to 2018 and build a Poisson panel fixed-effect model.PSM and Heckman’s two-stage method is employed here to examine the influential mechanism of CEO overconfidence on corporate financial fraud and the moderating effect of the CEO’s personal experience.The research conclusions are as follows.First,there is a positive correlation between CEO overconfidence and corporate financial fraud.In other words,companies with overconfident CEOs are more likely to commit financial violations.Second,the CEO’s overseas experience could strengthen the positive correlation between the two,which means overconfident CEOs with overseas experience are more prone to cause corporate financial irregularities.Third,in contrast,the CEO’s academic experience virtually weakens the positive relationship between the two,that is,the academic experience could help reduce the financial irregularities in companies with overconfident CEOs.Fourth,the CEO’s financial experience has no significant impact on this relationship.This study develops a new way to measure CEO overconfidence,enriches the literature on overconfidence and corporate financial fraud,the literature on high-order theory and imprinting theory,and has important implications for companies and investors.