The Effect of Managerial Overconfidence on Management Forecast Errors

One of items that attracts attention of financial statements users is earnings. In accounting literature, precise of earnings forecasts is very important. There are many factors that influence earnings forecasts. One of these factors is overconfidence that have important role in precise of earnings forecasts. Management forecasts also reflect company’s perspective. Hence the purpose of this study is examining the effect of managerial overconfidence on management earnings forecasts. To obtain this purpose, a sample of 112 listed companies in Tehran stock exchange between 2007 to 2013 is investigated. To measure managerial overconfidence, two measures of overconfidence based on the investment decisions were used. Research hypothesis is tested by using ordinary least squares method. The findings show that there is a direct and significant relationship between both measures of managerial overconfidence and management forecast errors. Since managerial overconfidence impacts on their forecast, investors should consider this factor when they are evaluating investments.