How CEOs’ overconfidence influences financial statement comparability under competition

Abstract

This research investigates the relationship between product market competition, Chief Executive Officers’ (CEOs) overconfidence and financial statement comparability. It presents evidence supporting the argument that product market competition diminishes financial statement comparability consistent with the agency problem. Furthermore, it suggests that this negative relationship intensifies when CEOs display overconfidence. A tendency to underestimate risks and have an exaggerated view of one's abilities are indicators of overconfidence leading to the comparability of financial statements. This study analyzes 53,233 data observations spanning from 1992 to 2022 using firm and year-fixed effects panel regressions. The empirical findings confirm a negative relationship between product market competition and financial statement comparability. Moreover, this negative relationship is more pronounced under the leadership of overconfident CEOs. These findings remain robust even after we address other potential measurement concerns related to product market competition. Ultimately, this study highlights the necessity for regulatory institutions to closely monitor firms operating in competitive markets particularly those led by overconfident managers. Additionally, policymakers and regulatory bodies should exercise increased scrutiny when evaluating the financial reporting of such firms to enhance investor confidence. Future research could investigate alternative methods for deriving overconfidence measures from publicly available databases and examine how regulatory and institutional differences in various countries impact the quality of financial reporting including financial statement comparability.