Optimism or Over-Precision? What Drives the Role of Overconfidence in Managerial Decisions?
64 Pages Posted: 3 Feb 2017 Last revised: 22 Feb 2022
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: Suggested Citation