Managers’ Self-Serving Attribution Bias and Corporate Financial Policies

The self-serving attribution bias ("SAB") refers to individuals taking responsibility for good outcomes and blaming others for bad outcomes. Consistent with the existence of managerial SAB, I find that managers tend to use more first-person pronouns (relative to second- and third-person pronouns) in the Management Discussions and Analysis Section of the 10-K filings when firm performance is better. A consequence of SAB is overconfidence (i.e., overestimating the mean and underestimating the variance of future cash flows). Consistent with this argument, managers with more SAB are more likely to issue forward-looking statements and make earnings forecasts, the tone (e.g., positive versus negative) of their forward-looking discussions has smaller variation, and their earnings forecasts tend to be overly optimistic. Firms whose managers have more SAB have higher investment-cash flow sensitivity and experience more negative market reactions around acquisition announcements. These firms also tend to have higher leverage, rely more on long-term debt financing, are more likely to repurchase stocks, and are less likely to issue dividends. Collectively, the evidence suggests that managers have self-serving attribution bias and this bias has implications for corporate policies.