Abstract

Purpose: Accounting information is among the most important sources of information required by capital markets for determining stock value. The relationship between accounting information and stock value or stock returns, referred to as the value relevance of accounting information, is influenced by various factors. Managers’ capabilities and personality characteristics are among these factors, and examining their effects on the value relevance of accounting information falls within the domain of behavioral accounting. Given the importance of this issue, this study investigates the impact of managerial ability and two managerial personality characteristics—overconfidence and narcissism—on the value relevance of accounting information in order to provide guidance for investors and accounting professionals.

Method: This study is applied in terms of purpose and descriptive-correlational in terms of its nature and methodology. Based on the type of data used, it is classified as an ex post facto study. The research period covers ten years, from the beginning of 1394 to the end of 1403.The sample consists of 139 companies listed on the Tehran Stock Exchange. Data were collected through library research and document analysis, and the research hypotheses were tested using multivariate linear regression models.

Findings: The results of hypothesis testing using multivariate linear regression models support all three research hypotheses at the 5% significance level. The findings related to the first hypothesis indicate that managerial ability has a significant effect on the value relevance of accounting information at the 95% confidence level. The results of the second hypothesis reveal that the personality characteristic of managerial narcissism has a significant impact on the value relevance of accounting information. Furthermore, the findings concerning the third hypothesis demonstrate that managerial overconfidence significantly affects the value relevance of accounting information at the 5% significance level.

Conclusion: Financial reports contain useful information for various stakeholders in making decisions, including investment decisions. Several criteria are available for evaluating the usefulness of accounting reports. The value relevance of accounting information, as one of the most important measures of its usefulness, is influenced by managers’ personality characteristics and abilities. Investors place greater confidence in the accounting information of firms managed by more capable executives when assessing corporate value. On the other hand, narcissistic managers may exploit their authority and information asymmetry to distort and manipulate financial reports, thereby producing and disclosing lower-quality information. Consequently, information disclosed by narcissistic managers exhibits lower value relevance and is considered less useful by investors in determining firm value. In addition, overconfident managers, due to their excessive self-confidence, tend to employ unrealistic and overly optimistic estimates and engage in aggressive accounting disclosures. Therefore, investors assign less weight to the accounting information of firms managed by such individuals when valuing companies and evaluating their shares, compared with firms managed by other executives. From the perspectives of agency theory and signaling theory, capable managers, unlike less capable managers, are able to use accounting information as a tool to reduce agency costs and improve the quality of decision-making. The analyses of this study indicate that capable managers improve future cash flows by allocating resources efficiently and selecting investment projects with rates of return higher than the cost of capital and convey this superior performance to the market through accounting components. Regarding narcissism, narcissistic managers, driven by a psychological need for social approval and the display of power, tend to use accounting information to create a positive halo effect around themselves and the company’s performance. This tendency leads to bias in financial reporting and the extensive use of earnings management to align reported performance with optimistic market expectations. From a theoretical perspective, such behavior causes accounting information to deviate from genuine signaling and move toward artificial signaling. Consequently, upon recognizing this behavioral risk, the market reduces the reliability of the information and weakens its value relevance by applying a higher discount rate or reducing the sensitivity of stock prices to earnings.



Furthermore, managerial overconfidence affects information quality through estimation bias. Overconfident managers are generally subject to systematic errors in their decision-making processes and forecasts and tend to underestimate the risks associated with investment projects.This phenomenon manifests in financial reporting through optimistic estimates of accounting items, such as provisions, fair values, and allowance for doubtful accounts. Such inaccuracies in estimates lead to higher rates of financial statement restatements and increased operational risk. From the perspective of capital markets, when investors are confronted with information that is highly likely to be subject to behavioral bias, the predictive value of such information declines. In fact, these behavioral characteristics, by creating uncertainty regarding the integrity and accuracy of financial reporting, prevent accounting information from properly reflecting the firm’s underlying value, thereby resulting in a gap between book value/earnings and market value.