Managerial Overconfidence and Earning Forecast Errors

Document Type : Research Paper

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Abstract

In accounting literature, earnings forecast accuracy has always been very important to financial statement users.  There are many factors influencing earnings forecasts, including overconfidence that has an important role in earning forecasts accuracy. Hence, the purpose of this study is examining the effect of managerial overconfidence on management earnings forecasts. The  sample consists of 112 firms listed in Tehran stock exchange during 2007 to 2013. To measure managerial overconfidence,  CAPEX and Over-Invest are used as two criteria related to investment decisions. To calculate earnings forecast errors, the difference between real earnings per share and forecast earnings per share has been divided by absolute value of forecast earnings per share. Research hypothesis is tested using ordinary least squares method. Findings show that there is a positive significant relationship between the both criteria of managerial overconfidence and management forecast errors. In other words, managers with overconfidence have more forecast earnings. Since managerial overconfidence impacts on their forecast, investors should consider this factor when they are evaluating investments.

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