Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
John R. Graham
Duke University; NBER
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
September 18, 2013
Quarterly Journal of Economics, Forthcoming
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.
Number of Pages in PDF File: 38
Keywords: Overprecision, Overconfidence, Behavioral Bias, Behavioral Economics, Investment, Leverage, Expected Returns, Survey Methodology, Capital Structure, Executive Compensation, Risk, Volatility Forecasts, Market Forecasts, Debt Policy, Behavioral Finance, Risk Premium
JEL Classification: G31, G32, G35, D03, D22, D84Accepted Paper Series
Date posted: July 16, 2010 ; Last revised: September 18, 2013
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