38 Pages Posted: 16 Jul 2010 Last revised: 18 Sep 2013
Date Written: September 18, 2013
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: Suggested Citation
Ben-David, Itzhak and Graham, John R. 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