The Impact of Managerial Overconfidence on the Relationship Between Accounting Conservatism and the Lack of Transparency in Financial Reporting
Keywords:
Lack of transparency in financial reporting, accounting conservatism, xcessive management confidenceAbstract
This study aims to investigate the moderating role of managerial overconfidence in the relationship between accounting conservatism and the lack of transparency in financial reporting among companies listed on the Tehran Stock Exchange between 2019 and 2024. The study population included all listed firms on the Tehran Stock Exchange. A final sample of 176 companies (1056 firm-year observations) was selected using a systematic exclusion method. Accounting conservatism was measured using the Khan and Watts (2009) model, financial opacity was estimated using discretionary accruals based on the modified Jones model, and managerial overconfidence was captured via excess investment in assets. Data analysis was conducted using multivariate regression models via EViews 13. The results revealed a significant negative effect of accounting conservatism on financial reporting opacity (β = -0.453, p < 0.01). Additionally, managerial overconfidence significantly moderated this relationship, with the interaction term (Conservatism × Overconfidence) being positive and significant (β = +0.076, p < 0.01). This implies that overconfident managers reduce the effectiveness of conservative accounting in mitigating opacity. Accounting conservatism serves as an effective mechanism to enhance the transparency of financial reports, thereby improving stakeholder trust and market stability. However, managerial overconfidence can dilute this effect by weakening the enforcement of conservative principles, potentially leading to overly optimistic financial disclosures. It is recommended that firms invest in managerial self-awareness programs to mitigate the adverse impact of overconfidence on financial reporting.
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