Analysis of Financial Distress Caused by Managers’ Cognitive-Emotional Biases Based on the Narcissistic Approach

Recent research on financial distress in organizations shows that the mental prejudices of managers, due to their cognitive-emotional biases, can play an important role in identifying and creating financial distresses. With this end in view, this study, based on the narcissistic approach, aims at analyzing the emergence of financial distresses due to cognitive-emotional biases of managers in companies listed on the Tehran Stock Exchange. The statistical sample, which included 147 companies in the year 2019, was selected based on six criteria that determined the financial distresses in previous research. The results of the correlation and regression analysis showed that there is a direct and statistically significant relationship between managers’ cognitive-emotional biases (i.e., over trust, control illusion, conservatism, optimism, loss avoidance, and avoidance regret) and financial distresses, to the degree that the higher the organizational cognitive-emotional biases in managers exist, the more financial distresses would appear in the organizations. Based on the results, it is concluded here that the occurrence of financial distresses in companies could be due to the high level of cognitive-emotional biases in managers with narcissistic prejudices.