Essay On Managerial Overconfidence And Accounting Conservatism

According to (Kreitner & Kinicki, 2013), overconfidence bias, relates to our tendency to be over-confident about estimates or forecasts. This bias is particularly strong when you are asked moderate to extremely difficult questions rather

By Thomas Ahrens (London School of Economics), and Christopher Chapman (University of Oxford), from The Contemporary Accounting Research Vol. 21 No. 2 (Summer 2004) pp. 271–301.

Edmonds, T., Tsay, B., & Olds, P. (2011). Fundamental Managerial Accounting Concepts (6th ed.). New York, NY: McGraw-Hill/Irwin.

Day J. and Krakhmal V. (2006) fourth edition (2011), An introduction to accounting and finance in business, Milton Keynes, The Open University

Hilton, R. (2011). Managerial accounting: Creating value in a dynamic business environment (9th Ed.). McGraw-Hill. Hardcover ISBN: 9780073526928.

Folk, M., J., Garrsion, H., R., & Noreen, W., E., (2002). Introduction to Managerial Accounting. New York, NY: McGraw-Hill/Irwin.

Chapter 2 of the text book begins with an exercise designed to test the reader’s knowledge. The reader is to have a bounded range where a 98% confidence level is reached. I failed miserably in this exercise, which is probably why the chapter led with it. Bazerman writes that overconfidence is “the most robust finding in the psychology of judgment.” (p. 14) It is appears to be an innate characteristic for much of the population. Overconfidence has been studied by psychologists and three characteristics of overconfidence commonly appear: overprecision, overestimation, and overplacement. I am glad to know that I am a part of much of the population.

Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).

Historic cost depreciation is being used which leads to skewed numbers that misrepresent how well a product line will continue to operate in the future due to understated replacement value of fixed assets.

Brian J. Franklin, BBA Accounting ‘12, College of Business and Public Policy, University of Alaska Anchorage, 3211 Providence Drive, Anchorage, AK 99508, 907-268-4233 Ext. 401, bfranklin@frontiertutoring.com

The literature on conservatism accounting is very limited. Watts (2003), has suggested that conservatism is related to debt contracts, while Gjesdal & Antle (2001) suggest that conservatism is the interaction between income measurement and dividend covenants. Even though conservatism may be most favorable, the result derives from shareholders trading off cash flows in different periods, not from the need to protect the interests of creditors.

In the underlying paper the author re-examines the conservatism principle and its asymmetric effects on earnings. With samples consisting of all firm-year observations from 1963 to 1990 with returns data on the CRSP NYSE/AMEX Monthly files and respective accounting data on the COMPUSTAT Annual Industrial and Research files, he formulates and tests four major hypotheses to find evidence for his predictions. At first he chracterizes “conservatism in accounting as the more timely recognition in earnings of bad news regarding future cash flows than good news”.1 In his first hypothesis he predicts a more sensitive response of earnings towards bad news in comparison to good news, proxied by negative and positve annual stock returns. His second prediction is that earnings are more timely than cash flow, indicating a stronger association of accruals to conservative accounting effects. Hypotheses three and four account for a test on the

It has been become an issue of great concern that the accounting profession must find a common theory in order to address and put the issue at rest. This therefore, has called for the study of this topic under review “the demand for and supply of accounting theories: the market for excuses. As a result of this several questions have been raised. For instance, the question of why accounting theories are predominantly normative has been put forward by this article? Secondly, why no single theory in accounting profession that is generally or widely accepted? It has been argued that the financial accounting theories have been found to be ineffective most especially in the area of impacting accounting practice and policy, though, this has been

and therefore with a low information asymmetry. Managerial opportunism behaviour, measured by a dummy variable for earnings smoothing, seems to

The Burns and Scapens framework for analyzing managerial accounting change was built on the study of old institutional economics, which sees "economics as a process of social provision, subject to multiple and cumulative causation." This view culminates in a model that argues that the managerial accounting practices at institutions are subject to a process of constant change, influenced by routines and rules. The institutions contribute to these routines and rules, but so do actions on the part of managers within the institutions. By combining multiple influences over time, we arrive at modern managerial accounting practice. In other words, Burns and Scapens tells us that managerial accounting practice changes over time, influenced by a number of factors including rules, routines and actions.