CEO's Overconfidence, Cost stickiness, and Value Relevance of Accounting Information

Document Type : Original Article

Author

• Reza Abdolahnezhad Khalil Abad

Department of Accounting, Qaenat Branch, Islamic Azad University, Qaen, Iran

10.22067/ijaaf.2020.39427

Abstract

 CEO's overconfidence is one of the essential indices that influences financial policies. When sales decline, overconfident CEOs have overconfidence in their ability to bring sales back to the previous level and tend to overestimate sales, thereby increasing cost stickiness. Further, cost stickiness by manipulating the natural and expected costs process can affect accounting information content. Therefore, the CEO's overconfidence by influencing cost stickiness can also affect the value relevance. This paper shows that there is a positive and significant relationship between overconfidence and cost stickiness. There is also a negative and significant relationship between overconfidence and value relevance. Nevertheless, the effect of overconfidence through cost stickiness on value relevance is not confirmed.

Keywords

• Value relevance
• Cost stickiness
• CEO overconfidence
• Stock price

---

References

Aliradi Sharif, A. and Naderi, F. (2018). The role of cost stickiness in the relationship between earnings quality and its effective components. Accounting and Auditing Research, 38, (In Persian)

Alnodel, A.A. (2018). The Impact of IFRS adoption on the value relevance of accounting information: evidence from the insurance sector. International Journal of Business and Management, 13(4), 138-148.‏ http://www.ccsenet.org/journal/index.php/ijbm/article/view/73211

Anderson, M.C. and Banker, R. and Huang, R. and Janakiraman, S. (2007). Cost Behavior and Fundamental Analysis of SG&A Cost. Journal of Accounting, Auditing & Finance, 22(1), 1-28. https://doi.org/10.1177/0148558X0702200103

Banker, R.D. and Byzalov, D. and Chen, L. (2013). Employment Protection Legislation, Adjustment Costs and Cross-country Differences in Cost Behavior. Journal of Accounting and Economics, 55(1), 111-127. https://doi.org/10.1016/j.jacceco.2012.08.003

BenMohamed, E. and Fairchild, R. and Bouri, A. (2014). Investment Cash Flow Sensitivity under Managerial Optimism: New Evidence from NYSE Panel Data Firms. Journal of Economics, Finance and Administrative Science, 19, 11–18. https://ideas.repec.org/a/ris/joefas/0069.html

Ben Rejeb Attia, M. Lassoued, N. and Sassi, H. (2019). Financial reporting timeliness and the value relevance of earnings: Evidence from banks in the MENA countries. The International Trade Journal,  33(3), 277-301.‏ https://doi.org/10.1080/08853908.2018.1459212

Bo, Q. and Asna, W.M. and Yu, F.K. (2015). CEO overconfidence and Cost Stickiness. Available at: http://ssrn.com/abstract=2603249.

Burkhard, B. Agneta Siren, Ch. Van Essen, M. and Grichnik, D. (2018). A Meta-Analytic Approach to Understanding the Effects of CEO Overconfidence on Firm Performance. Academy of Management Annual Meeting Proceedings, 1, DOI: 10.5465/AMBPP.2018.91

Brown, R. and Sarma, N. (2007). CEO overconfidence, CEO dominance and corporate acquisitions. J. Econ. Bus, 59 (5), 358–379. https://doi.org/10.1016/j.jeconbus.2007.04.002

Chen, C. Gores, T. Nasev, J. Wu, S. and Ching, Y. (2019). CEOs versus CFOs: Managerial overconfidence and cost
Behavior. In Proceedings of the AAA 2019 Management Accounting Section (MAS) Meeting. Lauderdale, FL,
USA, https://ssrn.com/abstract=323310

Calleja, K. and  Steliaros, M. and Thomas, D. (2006). A Note on Cost Stickiness: Some International Comparisons. Management Accounting Research, 17(2), 127- 140. https://doi.org/10.1016/j.mar.2006.02.001

Campbell, C. and Johnson, S. and Rutherford, J. and Stanley, B. (2011). CEO Optimism and Forced Turnover. Journal of Financial Economics, 101(3), 695–712. https://doi.org/10.1016/j.jfineco.2011.03.004

Jensen, m.c. (1986). Agency costs of free cash flow, corporate
Finance, and takeovers. American Economic Review, 76(2),
323-329. https://www.jstor.org/stable/1818789

Hur, K.S. Kim, D.H. and Cheung, J.H. (2019). Managerial Overconfidence and Cost Behavior of R&D Expenditures. Sustainability, 11(18), https://doi.org/10.3390/su11184878

Koo, J. and Song, S. and Paik, T. (2014). Relationship between Agency Problem and Cost Stickiness: A Direct Test. International Business Research Conference, 84, 40-44. Doi: 10.21742/ijitmsb.2016.3.03

Kim, J.B. Wang, Zh. and Zhang, L. (2016). CEO Overconfidence and Stock Price Crash Risk. Contemporary Accounting Research, 33(4), 1720-1749. https://doi.org/10.1111/1911-3846.12217

Leng, J. Ozkan, A. and Trzeciakiewicz, A. (2018). CEO overconfidence and the Probability of Corporate Failure: Evidence from the UK. Available at SSRN 3184199.

Maaloul, A. Chakroun, R. and Yahyaoui, S. (2018). The effect of political connections on companies’ performance and value: Evidence from Tunisian companies after the revolution. Journal of Accounting in Emerging Economies, 8(2), 185-204.‏ https://doi.org/10.1108/JAEE-12-2016-0105

Marques, A. and Santos, C. and Costa, P. (2014). Cost Stickiness in Latin American Open Companies from 1997 to 2012. European Scientific Journal, 10(10),1857- 7431. https://doi.org/10.19044/esj.2014.v10n10p%25p

Namazi, M.  Ghaffari, M.  and Fereyduni, M. (2012). Fundamental Analysis of Costs and Cost Sticky Behavior Emphasizing Scope Changes in Tehran Stock Exchange. Journal of accounting advances, 4 (2) , 151-177. (in Persian)

Ohlson, J.A. (1995). Earnings, book value, and dividends in equity valuation. Contemporary Accounting Research, 11(2), 661–687. https://doi.org/10.1111/j.1911-3846.1995.tb00461.x

Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59(2), 197-216. https://www.jstor.org/stable/2353017

Wang, D. Sutherlandb, D. Ning, L. Wang, Y. and Pan, X. (2018). Exploring the influence of political connections and managerial overconfidence on R&D intensity in China's large-scale private sector firms. Technovation, 69, 40-53. Doi: 10.1016/j.technovation.2017.10.007

Xue, Sh. and Hong, Y. (2016). Earnings management, corporate governance and expense stickiness. China Journal of Accounting Research, 9(1), pp.41–58. https://doi.org/10.1016/j.cjar.2015.02.001

Ying, J.W. and Wang, Ch.F. (2018). Is an overconfident CEO good for advertising investments?. Australian Journal of Management, 43(3), https://doi.org/10.1177/0312896217733307

Yin, X. Hai, B.L. and Chen, J. (2019). Financial constraints and R&D investment: The moderating role of CEO
Characteristics. Sustainability, 11(15), 1-18. https://ideas.repec.org/a/gam/jsusta/v11y2019i15p4153-d253728.html