Examining Managerial Overconfidence Effect on Earnings Smoothing in Companies Listed in Tehran Stock Exchange

Abstract

Earnings smoothing is affected significantly by expectations about future earnings, and overconfidence affects such expectations. Overconfident managers by the belief that they possess special information (that the others do not) overestimate their information integrity and consequently their firms’ future earnings and cash flows, and usually have positive perspective on firm’s future risks and returns. This study investigates the impact of managerial overconfidence on earnings smoothing. The statistical population for this study consists of companies listed in the Tehran Stock Exchange between the years 2009 and 2013. To measure overconfidence, two criteria are defined that are based on investment decisions. Earnings smoothing is measured by the ratio of standard deviation of operating earnings to standard deviation of operating cash flow, both based on adjusted total assets. The results from research indicated a significant positive relationship between managerial overconfidence and earnings smoothing. Also, the results showed in the firms with higher systematic risk, the probability of earnings smoothing is more.

Keywords

• managerial overconfidence
• earnings smoothing
• managers’ investment decisions
• operating cash flow