IFRS 16 and firms’ risk in emerging markets: the impact of managerial overconfidence

Purpose The purpose of this study is to (1) investigate how IFRS 16 affects firms’ risk in Egypt and (2) examine the moderating role of managerial overconfidence on this relation. Design/methodology/approach This study uses data from the annual reports of 38 Egyptian firms from 2014 to 2022. This study employs the generalized method of moments (GMM) and the three-stage least squares (3SLS) as estimation techniques. Findings The results show that IFRS 16 positively affects Egyptian firm risk, while managerial overconfidence reduces this positive effect. Research limitations/implications This study has some limitations. First, the sample size was relatively small. Second, our analysis did not incorporate other metrics of managerial overconfidence owing to the unavailability of relevant data in Egypt. Practical implications This study assists stakeholders and regulators in realising the implications of IFRS 16 on a firm’s risk, especially in emerging markets. Also, it enables managers to identify and assess lease-related risks more accurately to assist in developing appropriate risk mitigation strategies and optimizing lease-related decision-making processes. Furthermore, it aids in enhancing comprehension and knowledge of the interplay between managerial behaviour and firm outcomes. Originality/value Grounded in agency theory, this study reveals novel empirical insights into the impact of IFRS 16 on firm risk, especially in the context of emerging markets. Utilizing behavioural decision theory and upper echelons theory, it examines the previously unexplored influence of managerial overconfidence on this relationship.