Optimism or Over-Precision? What Drives the Role of Overconfidence in Managerial Decisions?

64 Pages Posted: 3 Feb 2017 Last revised: 22 Feb 2022

See all articles by Ronghong Huang

Ronghong Huang

University of Queensland - Business School

Kelvin Jui Keng Tan

University of Queensland - Business School; Financial Research Network (FIRN)

Johan Sulaeman

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN); European Corporate Governance Institute (ECGI); Asian Bureau of Finance and Economic Research (ABFER)

Robert W. Faff

University of Queensland; Bond University

Date Written: March 15, 2017

Abstract

Overconfidence can be viewed as having two dimensions: optimism and over-precision. Extant empirical studies focus mostly on the former due to the difficulty in measuring the latter. This study develops accessible empirical measures to disentangle these two dimensions through a novel exploitation of earnings forecasts issued by firm managers. These measures capture appreciably different aspects of the link between overconfidence and managerial decisions. In terms of investment, CEOs displaying excess precision are more likely to scale up investment in real assets (especially via M&A); firms with more optimistic CEOs display no such proclivity. On the financing side, more optimistic CEOs and overly precise CEOs share a higher propensity to issue debt.

Keywords: Overconfidence, Optimism, Over-Precision, Miscalibration, Corporate Investment, Corporate Financing

JEL Classification: G31, G32, G34

Suggested Citation

Huang, Ronghong and Tan, Kelvin Jui Keng and Sulaeman, Johan and Faff, Robert W., Optimism or Over-Precision? What Drives the Role of Overconfidence in Managerial Decisions? (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2910840

Ronghong Huang

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Kelvin Jui Keng Tan (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Johan Sulaeman

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN) ( email )

Singapore

HOME PAGE: http://sites.google.com/site/johansulaeman/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/johan-sulaeman

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Bond University ( email )

Gold Coast, QLD 4229
Australia

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