Managerial Overconfidence and Corporate Policies

57 Pages Posted: 31 Dec 2007 Last revised: 19 Dec 2022

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Date Written: December 2007

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.

Suggested Citation

Ben-David, Itzhak and Harvey, Campbell R. and Graham, John Robert, Managerial Overconfidence and Corporate Policies (December 2007). NBER Working Paper No. w13711, Available at SSRN: https://ssrn.com/abstract=1079308

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance ( email )

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Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

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HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

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John Robert Graham (Contact Author)

Duke University ( email )

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United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

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United States

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