Behavioural Biases in Financial Reporting

Abstract

Financial reporting has to supply useful, reliable, comparable and neutral financial statements for the use of accounting reports. Notwithstanding, the presence of innumerable degrees of judgment and estimation involved in financial reporting will allow scope for behavior bias to impinge the managers to use it to report favorable financial information. The purpose of this research was to investigates the influence of behavior bias on financial reporting quality of listed companies in Nigeria. The research investigates how managerial overconfidence, optimism bias, confirmation bias, and loss aversion has effects on financial reporting quality. Theories on which behavior finance theory, bounded rationality theory, and positive accounting theory stand, support this research study. A research design known as quantitative ex-post facto research design, which will consist of firm-year observations sourced from annual reports and corporate disclosures, companies that have been listed with Nigerian Exchange Group. Managerial overconfidence, optimism bias, confirmation bias and loss aversion construct will be proxies using both executive characteristics, textual indicator as and observable decision variables of companies. Regression illustration showing an association with the negative direction between behavior bias and financial reporting quality, that there appears managerial overconfidence and optimism bias play the largest roles. Research conducted in Nigeria showed a confirmation that these four constructions of behavior bias influences financial reporting quality negatively and was statistically significant where optimism bias and managerial overconfidence having more roles to play than others. Hence there is the need to incorporate behavioral aspect of management of organization into financial reporting regulations, corporate governance, audit processes, and professional education by taking strong board surveillance, a more acute professional skepticism, a tendency towards a bias-awareness course as well as the use of structured tools to minimize behavioral bias effect on financial reporting quality and management, and a sound independent board committee was recommended.