What Kinds of Firms are Overconfident, and Why? Evidences from Management Earnings Forecast

Abstract

Previous research has argued that firm’s overconfidence is mainly due to psychological bias or miscalibration. This study tests the competing hypothesis that firm’s overconfidence is a well-motivated rational choice. Using a dataset on management earnings forecasts of 3,540 listed firms, we show that a large proportion of firms are consistently overconfident despite the fact that they receive feedbacks that their forecasts are overconfident. We identify a set of firm characteristics which can predict firm’s overconfidence well. Our results thus suggest that majority of firm’s overconfidence is not a behavioral bias or due to miscalibration. Rather, it is a rational choice.

Keywords: Overconfidence, Management forecast, Biased Belief Updating, behavioral economics

JEL Classification: D03, G30, M41, M45