Abstract

http://ssrn.com/abstract=1079308
 
 

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Managerial Overconfidence and Corporate Policies


Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; 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)

December 2007

NBER Working Paper No. w13711

Abstract:     
Miscalibration is a standard measure of overconfidence in both psychology and economics. Although it is often used in lab experiments, there is scarcity of evidence about its effects in practice. We test whether top corporate executives are miscalibrated, and whether their miscalibration impacts investment behavior. Over six years, we collect a unique panel of nearly 7,000 observations of probability distributions provided by top financial executives regarding the stock market. Financial executives are miscalibrated: realized market returns are within the executives' 80% confidence intervals only 38% of the time. We show that companies with overconfident CFOs use lower discount rates to value cash flows, and that they invest more, use more debt, are less likely to pay dividends, are more likely to repurchase shares, and they use proportionally more long-term, as opposed to short-term, debt. The pervasive effect of this miscalibration suggests that the effect of overconfidence should be explicitly modeled when analyzing corporate decision-making.

Number of Pages in PDF File: 57

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Date posted: December 31, 2007  

Suggested Citation

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

Contact Information

Itzhak Ben-David
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
Campbell R. Harvey
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
John Robert Graham (Contact Author)
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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