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Managerial Overconfidence and Discretionary Accounting Decisions around Turnovers: Evidence from the Banking Industry

Student: Anastasia Suraeva

Supervisor: Anastasia N. Stepanova

Faculty: Faculty of Economic Sciences

Educational Programme: Strategic Corporate Finance (Master)

Year of Graduation: 2020

The paper investigates the relationship between CEO overconfidence and earnings management following CEO turnover in the banking industry. Incoming CEOs in banks engage in so-called earnings bath during the turnover year: they manage earnings downwards by incurring high amounts of discretionary expenses. The incentives for such earnings management are strong since it gives the benefits both for the manager and for the bank. However, bank CEOs’ highly pronounced overconfidence can make him/her have unrealistically optimistic beliefs about the future and disregard all the benefits of an earnings bath in the turnover year. Using the sample of US banks and overconfidence proxy based on tone analysis, evidence is found in this paper that CEO overconfidence weakly moderates the relationship between the turnover and engagement in earnings bath measured by the extent of discretionary expenses.

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