Managerial overconfidence and manipulation of operating cash flow: Evidence from Korea✰

Daecheon Yang · Hyun-Tae Kim

31 citations0/0 files storedFinance research letters

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Auditing, Earnings Management, Governance Corporate Finance and Governance Working Capital and Financial Performance

Abstract

Managerial overconfidence theory documents that overconfident managers systemically overinvest with a greater preference for internal funds over debts or equities. This study postulates that a firm's exhausted operating cash flow (OCF) levels, stemming from the overinvestment of overconfident managers, induce them to manipulate reported OCF. We explore whether or how overconfident managers manipulate OCF levels for external reporting purposes. First, we find that overconfident managers adjust negative OCF in a positive direction more than rational peers. Further, we find that overconfident managers engage in higher discretion of OCF.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1988Illusion and well-being: A social psychological perspective on mental health.1999Unskilled and unaware of it: How difficulties in recognizing one's own incompetence lead to inflated self-assessments.1988Financing Constraints and Corporate Investment 2003Earnings Management through Real Activities Manipulation 1987Financing Constraints and Corporate Investment 1997Earnings management to avoid earnings decreases and losses 2005CEO Overconfidence and Corporate Investment

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2023Corporate governance, information disclosure and investment - Cash flow sensitivity 2020The relationship between managers' narcissism and overconfidence on corporate risk-taking 2021The relationship between narcissism, managerial overconfidence and comparability of financial statements of listed companies 2025Managerial overconfidence and corporate digital transformation

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