Relationship between Managerial Overconfidence and Internal Controls over Financial Reporting

Abstract

The aim of this study is to examine the association between managerial overconfidence and the existence of important weak points in internal controls in financial reporting of the firms listed in the Tehran Stock Exchange, TSE. In other studies, there are evidences on the effects of managerial overconfidence on firms’ control of activities. Based on the tenets of overconfidence, it is expected that the overconfident managers keep on internal control at less effectiveness. This is because they overestimate their own ability, and believe they can control events and risks, which are actually out of their control. This study used data collected from a sample of 90 firms listed in the TSE in the period 2007 to 2015, to test the hypothesis in logistic and panel data regression models. Findings indicated that there exists positive significant relationship between the managerial overconfidence and weaknesses in internal control, and that these managers are not able to mitigate the negative consequences of ineffective internal contorols (inefficient investments and low future operating efficiency).

Keywords

• internal control
• investment efficiency
• operational efficiency
• overconfidence