The Impact of Managerial Overconfidence, Measured by a New Method, on Conditional and Unconditional Accounting Conservatism and the Impact of Strong Monitoring on Their relationship

Overconfidence is one of the most important concepts in modern financial behavior which leads individuals to overestimate their knowledge and skills and underestimate the risks involved. This makes the prediction of phenomenon too extreme. Manager’s overconfidence may affect investment, financing & dividend policies of the firm. The aim of the present study is to investigate the effect of managerial over confidence on conditional and unconditional conservatism of accounting and the role of strong monitoring on the relationship of those. For this purpose 121 companies that were accepted at the Tehran Stock Exchange during the period of 2009 to 2013 were studied. In order to measure the conditional conservatism the modified model of Basu (1997) by Lafond and Roychodhury (2008) was exploited and to measure unconditional conservatism the Givoly and Hayn (2000) model was used. The findings shows that there exist a significant negative relationship between overconfidence and conditional & unconditional conservatism. Moreover strong monitoring reduces the effect of overconfidence on unconditional conservatism but it does not affect the relationship of overconfidence on conditional conservatism.