Events

Mr. Zijun Liu
Ph.D. Candidate in Accounting
Jesse H. Jones Graduate School of Business
Rice University

I examine the impact of managerial overconfidence on conservatism embedded in accounting standards in a setting in which managers can engage in evidence management to manipulate accounting reporting for private benefit. Prior literature postulates that accounting conservatism (e.g., in the form of asymmetric verification requirements for positive and negative accounting evidence) can curb managerial overconfidence. However, I show that when managers exhibit state-related overconfidence, accounting standards should become less, not more, conservative to maximize stakeholders’ welfare. I show that at the limit, the optimal accounting rules shift from conservatism toward neutrality. Moreover, I show that overconfident managers conduct less evidence management in equilibrium. As a result, when standards optimally adjust to managerial overconfidence, state-related managerial overconfidence unequivocally benefits stakeholders. My work offers an equilibrium rationale for the empirical finding that overconfident managers interpret conservatism embedded in standards more loosely.