Executive overconfidence and the slippery slope to financial misreporting

► About 1/4 of our 49 AAER firms meet the legal standards of intentional fraud. ► In the remaining 3/4 the initial misstatement reflects an optimistic bias. ► This bias makes the manager more likely to misstate in increasing amounts later. ► Overconfident executives are more likely to exhibit optimism. ► Thus, overconfident executives are more likely to start down the slippery slope.