Financial Reporting Quality and Relation between Managerial Overconfidence and Investment Efficiency

Managers’ personality traits can affect investment decisions of a firm. One of the most important personality traits of managers, which affects risk taking is overconfidence. Overconfidence can be defined as an idle belief  in oneself cognitive abilities, judgments and intuitive reasoning. Overconfident managers overestimate their information accuracy and consiquently, their enterprise future earnings and cash flows. Also they may invest in projects with no cash flow required to achieve shareholders' expected return.  This study is aimed to investigate effects of Financial Reporting Quality on the relation between Managerial Overconfidence and Investment Efficiency in Firms Listed in Tehran Stock Exchange. The sample consists of 112 firms listed in Tehran Stock Exchange during the years from 2007 to 2015. This study uses a manager's bias as a criterion in order to measure managerial overconfidence. Financial reporting quality in this study for each firm-year is measured using accounting data of a five year period and rolling regression.The results of testing first hypothesis suggest that managerial overconfidence leads to a reduction of investment efficiency.The results of testing second hypothesis indicates that Financial Reporting Quality weakens the relation between Managerial Overconfidence and Investment Efficiency. According to further investigations, firm size, sales growth and operating cash flow ratio have a significant relation with investment efficiency.