Job Market Papers
Managerial Overconfidence and Accounting Conservatism: A Theoretical Examination (Analytical / Theoretical Modeling)
Abstract: I examine the impact of managerial overconfidence on conservatism embedded in accounting standards in a setting in which managers can engage in evidence management to manipulate accounting reporting for private benefit. Prior literature postulates that accounting conservatism (e.g., in the form of asymmetric verification requirements for positive versus negative accounting evidence) can curb managerial overconfidence. However, I show that when managers exhibit state-related overconfidence, accounting standards should become less, not more, conservative to maximize stakeholders' welfare. I show that at the limit, the optimal accounting rules shift from conservatism toward neutrality. Moreover, I show that overconfident managers conduct less evidence management in equilibrium. As a result, when standards optimally adjust to managerial overconfidence, state-related managerial overconfidence unequivocally benefits stakeholders. My work offers an equilibrium rationale for the empirical finding that overconfident managers interpret conservatism embedded in standards more loosely.
Internal Control and Voluntary Disclosure (Empirical / Archival) with George Drymiotes, Brian Rountree and K. Sivaramakrishnan
Abstract: Stronger internal controls can shape voluntary disclosure in two competing ways: by limiting opportunistic reporting, they enhance disclosure quality, much like the improvements seen in mandatory reporting after SOX; yet they may also reduce managerial transparency to avoid exposing sensitive competitive information. Thus, theory suggests that more effective internal controls do not necessarily imply greater transparency. Indeed, we find that voluntary disclosures decline following improvements in internal controls, particularly in industries facing intense product market competition. While prior literature suggests enhanced internal control governance may improve transparency in mandatory reporting, our findings reveal that it may also discourage firms from sharing information voluntarily.
Other Working Papers
Disclosure Policy and Enforcement: The Role of Corporate Boards with George Drymiotes and K. Sivaramakrishnan, Revise & Resubmit at Contemporary Accounting Research
Abstract: The SEC holds corporate boards responsible for instituting proper controls to allay credibility concerns often associated with unaudited qualitative disclosures. In line with the SEC's stance on the board's role, we analyze a model in which the board (i) prescribes the firm's disclosure policy (a policy role), and (ii) chooses the extent to which it enforces compliance with the policy (a control role). The board's objective in our model is to balance profitability and a demand for information transparency from stakeholders, including shareholders, while contending with managerial incentives to inflate disclosures. We show that focusing solely on profitability prompts a no-disclosure policy. In contrast, focusing on both profitability and transparency induces the board to prescribe a pessimistic disclosure policy. We also find that the board prefers a less pessimistic disclosure policy when it must contend with managerial incentives to inflate disclosures. Interestingly, the board exploits managerial incentives to inflate disclosures, which implies the board sometimes prefers to turn a "blind eye" to managerial over-reporting by being lax in enforcing compliance.
Real Effects of Overconfidence and Debt Covenants with George Drymiotes and K. Sivaramakrishnan
Abstract: We investigate the impact of managerial overconfidence on the efficacy of debt contracting when overconfidence relates to productive ability. Prior research shows that state-related managerial overconfidence triggers tighter debt covenants in equilibrium. In contrast, we show that when managerial overconfidence is productivity-related, managers cede control to lenders less frequently. Lenders accept "looser" debt covenants but demand a higher face value of debt. Given a competitive debt market, we show that productivity-related overconfidence benefits shareholders. We also explore how accounting conservatism affects the interplay between managerial overconfidence and debt contracting. We find that purely from a debt contracting perspective, (i) the degree of accounting conservatism affects who has the control rights, (ii) the optimal degree of conservatism is interior, and (iii) there is a stronger demand for conservatism when managers are overconfident.
Managerial Overconfidence and Optimal Evidence Thresholds in Accounting Recognition Standards
Abstract: I examine how managerial overconfidence affects the design of evidence thresholds in accounting recognition standards when managers have inflated beliefs about the productivity of their efforts (i.e., productivity-related, or effort-related overconfidence). An evidence threshold determines when a standard mandates a certain accounting treatment of a transaction (e.g., capitalizing vs. expensing, recognition vs. disclosure). I show that in equilibrium overconfident managers engage in more evidence management (i.e., a negative accounting effect) but will supply more productive effort than rational managers (i.e., a positive real effect). I find that the negative accounting effect is outweighed by the positive real effect. An important implication of this result is when facing managerial overconfidence, standard setters should induce a lower "shadow threshold'' to maximize the shareholders' best interests. Moreover, when the cost of evidence management is sufficiently high, the official evidence threshold designated in the accounting standard should move downward. Taken together, these findings indicate that when managers exhibit effort-related overconfidence, evidence management can be beneficial for the shareholders. This result implies that there is less demand for other mechanisms such as accounting conservatism to offset the negative effects of managerial overconfidence, especially when such overconfidence is productivity related.
Work-In-Progress
Whistleblowing and Corporate Transparency: The Impact on Voluntary Disclosure with Brian Rountree and K. Sivaramakrishnan
Data collection in progress
Services
Ad hoc reviewer for:
Jornal of Accounting, Auditing and Finance
AAA Annual Meeting