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Managerial Miscalibration

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  • Itzhak Ben-David
  • John R. Graham

Abstract

Using a unique 10-year panel that includes more than 13,300 expected stock market return probability distributions, we find that executives are severely miscalibrated, producing distributions that are too narrow: realized market returns are within the executives' 80% confidence intervals only 36% of the time. We show that executives reduce the lower bound of the forecast confidence interval during times of high market uncertainty; however, ex post miscalibration is worst during periods of high uncertainty. We also find that executives who are miscalibrated about the stock market show similar miscalibration regarding their own firms' prospects. Finally, firms with miscalibrated executives seem to follow more aggressive corporate policies: investing more and using more debt financing. JEL Codes: G31, G32, G34, D03, D22, D84. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 128 (2013)
Issue (Month): 4 ()
Pages: 1547-1584

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Handle: RePEc:oup:qjecon:v:128:y:2013:i:4:p:1547-1584

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  1. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 1839-1885, December.
  2. Gilles Hilary & Lior Menzly, 2006. "Does Past Success Lead Analysts to Become Overconfident?," Management Science, INFORMS, INFORMS, vol. 52(4), pages 489-500, April.
  3. Puri, Manju & Robinson, David T., 2007. "Optimism and economic choice," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(1), pages 71-99, October.
  4. Eric Van den Steen, 2004. "Rational Overoptimism (and Other Biases)," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1141-1151, September.
  5. Anand M. Goel & Anjan V. Thakor, 2008. "Overconfidence, CEO Selection, and Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 63(6), pages 2737-2784, December.
  6. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
  7. Bertrand, Marianne & Schoar, Antoinette, 2003. "Managing With Style: The Effect of Managers on Firm Policies," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4280-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Hackbarth, Dirk, 2008. "Managerial Traits and Capital Structure Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 43(04), pages 843-881, December.
  9. Simon Gervais & Itay Goldstein, 2007. "The Positive Effects of Biased Self-Perceptions in Firms," Review of Finance, European Finance Association, European Finance Association, vol. 11(3), pages 453-496.
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Cited by:
  1. Gene Amromin & Steven Sharpe, 2012. "From the horse’s mouth: how do investor expectations of risk and return vary with economic conditions?," Working Paper Series, Federal Reserve Bank of Chicago WP-2012-08, Federal Reserve Bank of Chicago.
  2. Jakob de Haan & David-Jan Jansen, 2011. "Corporate culture and behaviour: A survey," DNB Working Papers, Netherlands Central Bank, Research Department 334, Netherlands Central Bank, Research Department.
  3. Michał Krawczyk, 2011. "Overconfident for real? Proper scoring for confidence intervals," Working Papers, Faculty of Economic Sciences, University of Warsaw 2011-15, Faculty of Economic Sciences, University of Warsaw.
  4. Laux, Volker & Stocken, Phillip C., 2012. "Managerial reporting, overoptimism, and litigation risk," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 53(3), pages 577-591.
  5. Huang, Jiekun & Kisgen, Darren J., 2013. "Gender and corporate finance: Are male executives overconfident relative to female executives?," Journal of Financial Economics, Elsevier, Elsevier, vol. 108(3), pages 822-839.
  6. Nicolosi, Gina, 2013. "Demographics of dividends," Journal of Corporate Finance, Elsevier, Elsevier, vol. 23(C), pages 54-70.
  7. Julio J. Rotemberg, 2010. "A Behavioral Model of Demandable Deposits and its Implications for Financial Regulation," NBER Working Papers 16620, National Bureau of Economic Research, Inc.
  8. Pfajfar, D. & Zakelj, B., 2012. "Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Revised version of CentER DP 2011-053)," Discussion Paper, Tilburg University, Center for Economic Research 2012-072, Tilburg University, Center for Economic Research.
  9. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(3), pages 695-712, September.
  10. Bennani, Hamza, 2014. "Does one word fit all? The asymmetric effects of central banks' communication policy," MPRA Paper 57150, University Library of Munich, Germany.
  11. Salima TAKTAK & Mohamed Ali AZOUZI & Mohamed TRIKI, 2013. "Why Entrepreneur Overconfidence Affect Its Project Financial Capability: Evidence From Tunisia Using The Bayesian Network Method," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 3(2), pages 61-84, June.
  12. Alia Gizatulina, 2012. "Interpreting How Others Interpret It: Social Value of Public Information," CESifo Working Paper Series, CESifo Group Munich 3787, CESifo Group Munich.
  13. Baker, Malcolm & Pan, Xin & Wurgler, Jeffrey, 2012. "The effect of reference point prices on mergers and acquisitions," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 49-71.
  14. Sonsino, Doron & Regev, Eran, 2013. "Informational overconfidence in return prediction – More properties," Journal of Economic Psychology, Elsevier, Elsevier, vol. 39(C), pages 72-84.

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