Managerial overconfidence, earnings management and the moderating role of business ethics: evidence from the Stoxx Europe 600

Purpose

This paper aims to explore the relationship between CEO overconfidence and earnings management examined by the discretionary accruals and if this relationship is moderated by business ethics.

Design/methodology/approach

Data from a sample of 246 European firms selected from the Stoxx Europe 600 Index between 2010 and 2022 were used to test the model using panel data and multiple regressions. This paper considered the feasible generalized least squares (FGLS) estimation for linear panel data models. A multiple regression model is used to analyze the moderating effect of business ethics on the association between CEO overconfidence and earnings management. For robustness analyses, this paper included the alternative measure of the dependent variable and independent variable.

Findings

Using discretionary accruals as a proxy for earnings management, the empirical results show a positive relationship between CEO overconfidence and earnings management. Furthermore, the results suggest that business ethics negatively moderates the relationship between CEO overconfidence and earnings management.

Practical implications

This paper makes a significant contribution to stakeholders such as investors, financial decision-makers and auditors. It underscores the importance of integrating ethical considerations into corporate governance practices for fostering accountability and transparency. In addition, it highlights the moderating role of business ethics in transforming the positive effect of CEO overconfidence on earnings management into a negative impact. This emphasizes the pivotal role of ethical norms in financial decision-making processes and extends implications to standard setters and policymakers in the regulatory domain.

Originality/value

To the best of the authors’ knowledge, this is the first study to examine the moderating role of business ethics on the relationship between CEO overconfidence and earnings management in the European context. It is also the first study to document that business ethics can reduce the effect of CEOs’ biased behavior and their scope for discretion, thereby reducing the amount of earnings management. This study fills a research gap by extending the existing literature, which generally focuses on the impact of CEO overconfidence and earnings management.