Managerial overconfidence and manipulation of operating cash flow: Evidence from Korea✰

Abstract

Managerial overconfidence theory documents that overconfident managers systemically overinvest with a greater preference for internal funds over debts or equities. This study postulates that a firm's exhausted operating cash flow (OCF) levels, stemming from the overinvestment of overconfident managers, induce them to manipulate reported OCF. We explore whether or how overconfident managers manipulate OCF levels for external reporting purposes. First, we find that overconfident managers adjust negative OCF in a positive direction more than rational peers. Further, we find that overconfident managers engage in higher discretion of OCF.