Endogenous Overconfidence in Managerial Forecasts

Posted: 25 Mar 2011

See all articles by Gilles Hilary

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Charles Hsu

Hong Kong University of Science & Technology

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2011

Abstract

We examine whether attribution bias that leads managers who have experienced short-term forecasting success to become overconfident in their ability to forecast future earnings. Importantly, this form of overconfidence is endogenous and dynamic. We also examine the effect of this cognitive bias on the managerial credibility. Consistent with the existence of dynamic overconfidence, managers who have predicted earnings accurately in the previous four quarters are less accurate in their subsequent earnings predictions. These managers also display greater divergence from the analyst consensus and are more precise. Lastly, investors and analysts react less strongly to forecasts issued by overconfident managers.

Keywords: Overconfidence, Management Forecast, Managerial Credibility

JEL Classification: G30, M41, M45

Suggested Citation

Hilary, Gilles and Hsu, Charles, Endogenous Overconfidence in Managerial Forecasts (March 18, 2011). INSEAD Working Paper No. 2011/39/AC. Available at SSRN: https://ssrn.com/abstract=1789664

Gilles Hilary (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Charles Hsu

Hong Kong University of Science & Technology ( email )

Hong Kong
Hong Kong
852-2358-7568 (Phone)
852-2358-1693 (Fax)

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