CEO overconfidence, CEO compensation, and earnings manipulation

Chia Feng Jeffrey Yu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)


In the wake of recent financial crises and corporate failures, chief executive officers (CEOs) are often blamed for their overconfidence leading to earnings manipulation and excessive risks. Why is it then that these overconfident CEOs obtain job offers in the first place? This paper presents a novel explanation for the co-existence of CEO overconfidence and earnings manipulation observed in practice. In an agency model with an external capital market, I identify two potential reasons for a board to hire an overconfident CEO and design a contract that accommodates earnings manipulation: an internal motive, directed at maximizing the ex ante firm value, and an external motive, directed at enhancing the interim market valuation of the firm. The flip side, however, is that the firm can be more likely to become insolvent and bear greater risks of bankruptcy. Some policy implications and limitations are also discussed.

Original languageEnglish
Pages (from-to)167-193
Number of pages27
JournalJournal of Management Accounting Research
Issue number2
Publication statusPublished - 1 Jan 2014
Externally publishedYes


  • CEO overconfidence
  • CEO selection
  • Earnings manipulation
  • Executive compensation


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