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Article
Publication date: 21 September 2011

Dalia Marciukaityte and Samuel H. Szewczyk

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading…

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Abstract

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

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Review of Behavioural Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 1 February 2003

J.B. HEATON

Most high‐stakes litigation settles prior to the trial verdict being achieved. This apparent class action settlement pressure raises an interesting risk finance question addressed…

204

Abstract

Most high‐stakes litigation settles prior to the trial verdict being achieved. This apparent class action settlement pressure raises an interesting risk finance question addressed by the authors in this article. The article describes the basic law and economics of settlement risk within the context of potential and limitations of insurance and capital markets solutions.

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The Journal of Risk Finance, vol. 4 no. 3
Type: Research Article
ISSN: 1526-5943

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Book part
Publication date: 19 August 2015

Anoop Menon

This chapter explores the phenomenon of managerial overoptimism, focusing on the cognitive underpinnings of the mechanisms that generate this bias. It develops a formal model of…

Abstract

This chapter explores the phenomenon of managerial overoptimism, focusing on the cognitive underpinnings of the mechanisms that generate this bias. It develops a formal model of probability estimation that is inspired by the biological (cognitive neuroscience) evidence on associative information processing in the brain. The model is able to make novel, testable predictions about managerial overoptimism. It is able to parse out three mechanisms that could lead to overoptimism, as well as predict boundary conditions on when these effects should be observed and when the opposite (a pessimistic bias) should be observed instead. Furthermore, it predicts that under certain conditions, attempts by managers to “debias” their estimates might exacerbate the overoptimistic bias.

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Cognition and Strategy
Type: Book
ISBN: 978-1-78441-946-2

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Article
Publication date: 1 April 2002

J.B. HEATON

Legal solvency tests play a crucial role in high‐stakes financial transactions. This article presents a brief introduction to legal solvency tests that play important roles in…

381

Abstract

Legal solvency tests play a crucial role in high‐stakes financial transactions. This article presents a brief introduction to legal solvency tests that play important roles in bankruptcy and corporate law. The author then proceeds to analyze these tests from the perspective of financial economics, and argues that optimal solvency tests should be context‐dependent.

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The Journal of Risk Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 21 April 2010

Masaya Ishikawa and Hidetomo Takahashi

This study examines the relationship between managerial overconfidence and corporate financing decisions by constructing proxies for managerial overconfidence based on the track…

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This study examines the relationship between managerial overconfidence and corporate financing decisions by constructing proxies for managerial overconfidence based on the track records of earnings forecasts in Japanese listed firms. We find that managers have the stable tendency to forecast overly upward earnings compared to actual ones and that their upward bias decreases the probability of issuing equity in the public market by about 4.7 percent per one standard error, which economically has the strongest impact on financing decisions. This tendency is observed when we employ alternative measures for managerial overconfidence and other model specifications. However, in private placements, the choice to offer equity is not always avoided by managers. This implies that managers place private equity with the expectation of the certification effect

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Review of Behavioural Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 1 January 2001

J.B. Heaton

Until recently, financial intermediaries have behaved as though immune from the bite of intellectual property law. However, recent decisions of the federal courts and acquiescence…

188

Abstract

Until recently, financial intermediaries have behaved as though immune from the bite of intellectual property law. However, recent decisions of the federal courts and acquiescence by Congress have created a new legal landscape. This article explores the basic principles and implications of patent law for risk finance, specifically in terms of emerging opportunities and incentives related to structured risk management solutions. In so doing, the discussion introduces the trade‐off between past reliance on trade secret law versus the evolving trend toward financial patents. The author addresses its influence within the convergence markets, and argues that patents may play a significant role in future financial and insurance innovation.

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The Journal of Risk Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 15 February 2021

Zulfiqar Ali and Muhammad Zubair Tauni

The purpose of this paper is to determine how CEO overconfidence influences firm’s future risk in a sample of Chinese listed firms. It further examines the moderating effect of…

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Abstract

Purpose

The purpose of this paper is to determine how CEO overconfidence influences firm’s future risk in a sample of Chinese listed firms. It further examines the moderating effect of institutional investors on the association between CEO overconfidence and future firm risk.

Design/methodology/approach

The initial sample consists of Chinese A-share issuing firms listed on Shanghai and Shenzhen Stock Exchanges during the period starting from 2000 to 2017. This study classifies a CEO as overconfident if the forecasted profits of the firm are greater than the actual profits for majority of the time during the tenure of the CEO. Ordinary least squares regression is used as the primary estimation method for generating the results, however, firm fixed effects and two-stage least squares regressions have also been used for verifying the robustness of the results.

Findings

The results demonstrate that CEO overconfidence leads to an escalation in firm’s risk level over the subsequent years. However, the intensity of this positive association is weaker in state-owned firms. Analysis of the moderating effect of institutional investors reveals that only active institutional investors, specifically mutual funds and foreign institutional investors, play their governance role in reducing the effect of CEO overconfidence on firm’s risk level. Furthermore, the moderating effect of active institutional investors is weaker in state-owned firms.

Research limitations/implications

The empirical evidence obtained by this study suggests that CEOs should exercise extreme diligence in decision-making. They must analyze a situation based on realistic facts and figures, rather than having misperception about their excessive abilities in controlling the outcomes of a situation. The findings also imply that regulators and policymakers should formulate strategies for motivating mutual funds and foreign investors to increase their shareholding in Chinese firms.

Originality/value

To the best of the authors’ knowledge, this is the first study that examines the impact of CEO overconfidence on future firm risk, not the current firm risk. Besides, literature regarding the role of external governance mechanisms in the context of behavioral biases is extremely scant. This study contributes to the literature by analyzing how the association between CEO overconfidence and firm’s future risk is influenced by the institutional investors’ ownership.

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Chinese Management Studies, vol. 15 no. 5
Type: Research Article
ISSN: 1750-614X

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Book part
Publication date: 23 September 2014

Donald K. Clancy and Denton Collins

The purpose of this study is to review the capital budgeting literature over the past decade.

Abstract

Purpose

The purpose of this study is to review the capital budgeting literature over the past decade.

Design/methodology

Specifically, over the years 2004–2013, we review works appearing in the major academic journals in accounting, finance, and management. Further, we review the specialized academic journals in management accounting. We examine the frequency of articles by journal and year published, the type of research method applied, and the topic area studied. We then review the research findings by topic area.

Findings

We find 110 articles appearing in the selected journals. While the articles increase in frequency, the research methods applied are predominantly analytical and archival in nature with relatively few experiments, case studies, or surveys. Some progress is observed for capital budgeting techniques and new methods for structuring uncertainty. The studies find that the size of capital budgets is about right for companies with high financial reporting quality, for liquid companies, during periods of normal cash flow, when the budget is financed by equity, for companies when they first go public or first go private. Tax rates and financial reporting methods for depreciation and tax expenses distort capital budgets. Organization structure and performance measurement can distort capital budgeting. Individual differences, especially optimism and honesty, can influence capital budgeting decisions.

Limitations and Implications

This review is limited to the major journals in accounting, finance, and management; and the specialized journals in management accounting. There is much research to be done on capital budgeting, especially case studies of actual practice and experiments related to individual and group decision processes.

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Book part
Publication date: 6 September 2018

Ren-Raw Chen, Hsuan-Chu Lin and Michael Long

Myopic going concern practice refers to the current audit going concern opinion that a firm is rewarded a favorable going concern opinion as long as it has the capability to…

Abstract

Myopic going concern practice refers to the current audit going concern opinion that a firm is rewarded a favorable going concern opinion as long as it has the capability to satisfy its debt obligation in the following year. We show, via a structural agency problem we develop in the paper, that such a practice has a potential economic cost to the firm. We study Lucent Technologies Inc. in detail for its loss in economic value and also measure the magnitude of this impact with 500 companies. We find that Lucent should have lost its going concern status in 2002 as it had to sell off its assets to meet debt obligations and nearly 18% of the 500 firms suffer some degree of economic loss due to the agency problem.

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Advances in Pacific Basin Business, Economics and Finance
Type: Book
ISBN: 978-1-78756-446-6

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Book part
Publication date: 9 March 2021

Lian Duan

Abstract

Details

The Emerald Handbook of Blockchain for Business
Type: Book
ISBN: 978-1-83982-198-1

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