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Managerial Miscalibration

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  • Ben-David, Itzhak

    (Ohio State University)

  • Graham, John R.

    (Duke University)

  • Harvey, Campbell R.

    (Duke University)

Abstract

Miscalibration is a form of overconfidence examined in both psychology and economics. Although it is often analyzed in lab experiments, there is scant evidence about the effects of miscalibration in practice. We test whether top corporate executives are miscalibrated, and study the determinants of their miscalibration. We study a unique panel of over 11,600 probability distributions provided by top financial executives and spanning nearly a decade of stock market expectations. Our results show that financial executives are severely miscalibrated: realized market returns are within the executives' 80% confidence intervals only 33% of the time. We show that miscalibration improves following poor market performance periods because forecasters extrapolate past returns when forming their lower forecast bound ("worst case scenario"), while they do not update the upper bound ("best case scenario") as much. Finally, we link stock market miscalibration to miscalibration about own-firm project forecasts and increased corporate investment.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2010-12.

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Date of creation: Jul 2010
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Handle: RePEc:ecl:ohidic:2010-12

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References

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  1. Anand M. Goel & Anjan V. Thakor, 2008. "Overconfidence, CEO Selection, and Corporate Governance," Journal of Finance, American Finance Association, vol. 63(6), pages 2737-2784, December.
  2. Eric Van den Steen, 2004. "Rational Overoptimism (and Other Biases)," American Economic Review, American Economic Association, vol. 94(4), pages 1141-1151, September.
  3. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
  4. Marianne Bertrand & Antoinette Schoar, 2003. "Managing With Style: The Effect Of Managers On Firm Policies," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1169-1208, November.
  5. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  6. Simon Gervais & Itay Goldstein, 2007. "The Positive Effects of Biased Self-Perceptions in Firms," Review of Finance, European Finance Association, vol. 11(3), pages 453-496.
  7. Hackbarth, Dirk, 2008. "Managerial Traits and Capital Structure Decisions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(04), pages 843-881, December.
  8. Gilles Hilary & Lior Menzly, 2006. "Does Past Success Lead Analysts to Become Overconfident?," Management Science, INFORMS, vol. 52(4), pages 489-500, April.
  9. Puri, Manju & Robinson, David T., 2007. "Optimism and economic choice," Journal of Financial Economics, Elsevier, vol. 86(1), pages 71-99, October.
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Citations

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Cited by:
  1. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, vol. 101(3), pages 695-712, September.
  2. Huang, Jiekun & Kisgen, Darren J., 2013. "Gender and corporate finance: Are male executives overconfident relative to female executives?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 822-839.
  3. Sonsino, Doron & Regev, Eran, 2013. "Informational overconfidence in return prediction – More properties," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 72-84.
  4. Jakob de Haan & David-Jan Jansen, 2011. "Corporate culture and behaviour: A survey," DNB Working Papers 334, Netherlands Central Bank, Research Department.
  5. Baker, Malcolm & Pan, Xin & Wurgler, Jeffrey, 2012. "The effect of reference point prices on mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 106(1), pages 49-71.
  6. 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, vol. 3(2), pages 61-84, June.
  7. 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 WP-2012-08, Federal Reserve Bank of Chicago.
  8. Laux, Volker & Stocken, Phillip C., 2012. "Managerial reporting, overoptimism, and litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 577-591.
  9. Michał Krawczyk, 2011. "Overconfident for real? Proper scoring for confidence intervals," Working Papers 2011-15, Faculty of Economic Sciences, University of Warsaw.
  10. Alia Gizatulina, 2012. "Interpreting How Others Interpret It: Social Value of Public Information," CESifo Working Paper Series 3787, CESifo Group Munich.
  11. 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.
  12. Pfajfar, D. & Zakelj, B., 2012. "Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Revised version of CentER DP 2011-053)," Discussion Paper 2012-072, Tilburg University, Center for Economic Research.
  13. Nicolosi, Gina, 2013. "Demographics of dividends," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 54-70.

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