Managerial overconfidence and corporate policies
By: Itzhak Ben-David, John R. Graham, Campbell R. Harvey.
Contributors: Graham, John R.; Harvey, Campbell R.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 13711; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13711.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Miscalibration is a standard measure of overconfidence in both psychology and economics.  Although it is often used in lab experiments, there is scarcity of evidence about its effects in practice.  We test whether top corporate executives are miscalibrated, and whether their miscalibration impacts investment behavior.  Over six years, we collect a unique panel of nearly 7,000 observations of probability distributions provided by top financial executives regarding the stock market.  Financial executives are miscalibrated: realized market returns are within the executives' 80% confidence intervals only 38% of the time.  We show that companies with overconfident CFOs use lower discount rates to value cash flows, and that they invest more, use more debt, are less likely to pay dividends, are more likely to repurchase shares, and they use proportionally more long-term, as opposed to short-term, debt.  The pervasive effect of this miscalibration suggests that the effect of overconfidence should be explicitly modeled when analyzing corporate decision-making"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 6/6/2008.

Includes bibliographical references.

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