The Spillover Effects of Management Overconfidence on Analyst Forecasts

Journal of Behavioral and Experimental Finance 12 (2016): 79-92. DOI: 10.1016/j.jbef.2016.10.004

Rotman School of Management Working Paper No. 2867634

Posted: 15 Nov 2016

See all articles by Lisa A. Kramer

Lisa A. Kramer

University of Toronto - Rotman School of Management

Chi Liao

University of Manitoba - Asper School of Business

Date Written: October 1, 2016

Abstract

Overconfident CEOs are known to overestimate their ability to generate returns, overpay for target firms, and take excessive risks. We find a CEO’s overconfidence can also indirectly affect other market participants, specifically analysts who issue earnings forecasts. First, firms with overconfident CEOs are more likely to have analysts issue earnings forecasts that are optimistic relative to actual earnings; that is, the earnings forecasts more frequently exceed the actual realized earnings than the reverse. Second, firms with overconfident CEOs tend to have less dispersed analyst earnings forecasts. And third, smaller analyst forecast errors are associated with firms that have overconfident CEOs. These findings demonstrate the importance of CEOs’ behavioral characteristics in shaping the environment in which analysts and other market participants make important financial decisions, in some cases improving the information environment.

Keywords: Analyst Forecasts, Manager Overconfidence, Earnings Forecasts, Market Efficiency

JEL Classification: G1, G14, G29, M41

Suggested Citation

Kramer, Lisa A. and Liao, Chi, The Spillover Effects of Management Overconfidence on Analyst Forecasts (October 1, 2016). Journal of Behavioral and Experimental Finance 12 (2016): 79-92. DOI: 10.1016/j.jbef.2016.10.004; Rotman School of Management Working Paper No. 2867634. Available at SSRN: https://ssrn.com/abstract=2867634

Lisa A. Kramer (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-2496 (Phone)
416-971-3048 (Fax)

HOME PAGE: http://www.chass.utoronto.ca/~lkramer

Chi Liao

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

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