Using a large sample of U.S. firms, we provide evidence of the effect of CFO overconfidence on firms' resource adjustment decisions. After controlling for CEO overconfidence, we find that CFO overconfidence is positively associated with cost stickiness. In addition, we find that CFO power relative to the CEO increases the positive association between CFO overconfidence and cost stickiness. Our study contributes to our understanding of the important role of CFOs in operational decisions such as resource adjustment decisions. We also extend the literature on cost behavior by highlighting managerial characteristics as an important determinant of resource adjustment decisions. Our study has important practical implications. Unlike resource adjustment decisions driven by agency problems or other incentive-related issues, such decisions driven by managerial overconfidence cannot be addressed with incentive contract designs. More promising ways to mitigate overconfidence-driven resource adjustment decisions include making overconfident managers aware of their potential behavioral biases and challenging their expectations.
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Research Article|
April 06 2021
CFO Overconfidence and Cost Behavior
Journal of Management Accounting Research JMAR-18-055.
Article history
Received:
August 16 2018
Accepted:
February 18 2021
Citation
Clara Xiaoling Chen, Julia Nasev, Steve Yu-Ching Wu; CFO Overconfidence and Cost Behavior. Journal of Management Accounting Research 2021; doi: https://doi.org/10.2308/JMAR-18-055
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