Managerial Miscalibration

38 Pages Posted: 16 Jul 2010 Last revised: 30 Oct 2019

See all articles by Itzhak Ben-David

Itzhak Ben-David

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

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

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

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2013

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.

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, D84

Suggested Citation

Ben-David, Itzhak and Graham, John Robert and Harvey, Campbell R., Managerial Miscalibration (September 18, 2013). Quarterly Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1640552 or http://dx.doi.org/10.2139/ssrn.1640552

Itzhak Ben-David (Contact Author)

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

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John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

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

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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