Managerial Miscalibration

Abstract:     
We test whether top financial executives are miscalibrated using a unique 10-year panel that includes over 13,300 probability distributions of expected stock market returns. 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 the lower bound of the forecast confidence interval is lower during times of high market uncertainty; however, ex-post miscalibration is worst during these episodes. 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 appear to follow more aggressive corporate policies: investing more and using more debt financing.

Number of Pages in PDF File: 49

Keywords: Overconfidence, Behavioral Biases, Behavioral Corporate Finance, Investment Policy, Payout Policy, Managerial Forecast, Survey Methodology, Stock Returns, Capital Structure, Executive Compensation, Risk, Volatility, Stock Market Forecasts, Debt Policy, Dividends, Behavioral Finance, Risk Premium

JEL Classification: G30, G31, G32, G35

working papers series