Can two biases be better than none? complementarity between CEO overconfidence and accounting conservatism
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Date
2014
Authors
Hsu1, C.
Novoselov, K.
Wang, R.
Journal Title
Journal ISSN
Volume Title
Publisher
Nazarbayev University
Abstract
We study the joint effect of CEO overconfidence and accounting conservatism on firm
performance and value. Successful innovation involves trial and error. An overconfident CEO is more
willing to initiate daring investment projects, but also subjects the firm to excessive risk. Accounting
conservatism (also referred to as prudence), on the other hand, accelerates the recognition of bad news,
giving managers additional time to search for creative solutions that could not be anticipated before
the project was undertaken. The theory of innovation, therefore, predicts that CEO overconfidence
and accounting conservatism are complementary, i.e., the presence of both biases improves the firm's
performance relative to the baseline case, especially if the firm operates in a dynamic, fast-changing
environment.
Description
Keywords
overconfidence, accounting conservatism, environment