The mediating effect of REM on the relationship between CEO overconfidence and subsequent firm performance moderated by IFRS adoption: A moderated-mediation analysis

CEO Overconfidence, Real Earnings Management, and Future Performance: Evidence from Indonesia

“…Based on the above theory, the characteristics of CEOs in the form of high confidence will affect the strategies and decisions made so as to affect the future performance of the company. Overconfident CEOs are motivated to conduct real earnings management to increase their public credibility [10,17,18]. Nevertheless, earnings management is alleged to have a negative future impact, especially real earnings management, that is declining operational performance of companies such as return on assets [28], operating cash flow [4] as along with the impact of real earnings management and manipulation of sales figures will have a negative impact on return on equity, earnings per share, and decline in the value of the price to earnings ratio [5].…”

“…Overconfident CEO can be interpreted as an overestimation of his ability and knowledge that will positively impact his actions within the company [18]. [29] states that overconfidence as a form of cognitive deviation is a psychological aberration entailing the excessive estimation of future performance results, so it can mean overconfidence is the tendency to think too optimistically, and thus at times unrealistically, generating a negative effect on company policy.…”

“…In this study merged the value of real earnings management (e.g., sales manipulation, overproduction, discretionary expenditure budget cuts) to obtain the overall total value of the real earnings management by adding all residual values of the three components (REM). The calculation of the merger of real earnings management values follows previous research conducted by [4,18] by adding the following standardized residual values: REM = AbnCFLO*(-1) + AbnOP + AbnDE*(-1)…”

“…This study was conducted to discover any contradictions between the premise that overconfident CEO leads to risktaking, focuses on new investment and innovation strategies supported by research and development. But some studies show that overconfident CEO prefer real earnings management practices by cutting research and development expenditure budgets in order to achieve expectations for a specific earnings target or to maintain his reputation and credibility before the public [10,17,18]. Cuts in research and development expenditure budgets are used to increase cash flow from operating activities as well as earnings in the current period [2,3,19,20].…”

“…Accordingly, this study uses three ways of measuring the impact of CEO overconfidence: (1) by proxy overinvestment [10,18]; (2) [22][23][24][25] by using a CEO photo revealed in the annual report; (3) by using NVIVO software to determine the percentage of words that indicate an overconfident CEO.…”