Manager sentiment and conditional conservatism

Daniel W. Collins; Nhat Q. Nguyen; Tri T. Nguyen

doi:10.1111/jbfa.12780

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Manager sentiment and conditional conservatism

Journal article

Open access

Peer reviewed

Manager sentiment and conditional conservatism

Daniel W. Collins, Nhat Q. Nguyen and Tri T. Nguyen

Journal of business finance & accounting, Vol.51(9-10), pp.2336-2370

01/15/2024

DOI: 10.1111/jbfa.12780

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Abstract

This study examines the effect of manager sentiment on conditional conservatism. Manager sentiment refers to widely held beliefs of financial managers about their firms' future economic prospects that are not justified by available economic fundamentals. Manager sentiment is likely to affect conditional conservative reporting because the decision to recognize unrealized economic losses in a timely manner flows from financial managers' beliefs about their firms' future cash flow prospects. We predict and find that manager sentiment is negatively associated with conditional conservatism, indicating that firms report less conservatively during periods of high manager sentiment (over-optimism) and more conservatively during periods of low manager sentiment (over-pessimism). Moreover, the effects of manager sentiment on conditional conservatism remain strongly negative after controlling for manager overconfidence. We further find that asset write-offs are lower during high sentiment periods but higher in subsequent periods. Importantly, the manager sentiment effect on conservatism is incremental, and the opposite in sign, to the effect of investor sentiment, which has not been demonstrated in prior literature.

asset impairment

asset write-offs

asymmetric timely loss recognition

behavioral bias

capital markets

conditional conservatism

investor sentiment

manager optimism

manager overconfidence

manager sentiment

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Details

Title: Subtitle: Manager sentiment and conditional conservatism
Creators: Daniel W. Collins - University of Iowa, Accounting
Nhat Q. Nguyen - Colorado State University
Tri T. Nguyen - University of Roehampton
Resource Type: Journal article
Publication Details: Journal of business finance & accounting, Vol.51(9-10), pp.2336-2370
Publisher: Wiley
DOI: 10.1111/jbfa.12780
ISSN: 0306-686X
eISSN: 1468-5957
Number of pages: 35
Grant note: Kent State University University of Iowa University of Roehampton
Language: English
Date published: 01/15/2024
Academic Unit: Accounting
Record Identifier: 9984741057802771

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