BenDavidGrahamHarvey2012 - Managerial Miscalibration

BenDavidGrahamHarvey2012 - Managerial Miscalibration -...

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Electronic copy available at: http://ssrn.com/abstract=1640552 Charles A. Dice Center for Research in Financial Economics Managerial Miscalibration Itzhak Ben - David, Fisher College of Business, The Ohio State University John R. Graham, Fuqua School of Business, Duke University Campbell R. Harvey Fuqua School of Business, Duke University Dice Center WP 2010 - 12 Fisher College of Business WP 2010 - 03 - 012 Revision: August 2012 Original: July 2010 This paper can be downloaded without charge from: http://www.ssrn.com/abstract1640552. An index to the working paper in the Fisher College of Business Working Paper Series is located at: http://www.ssrn.com/link/Fisher - College - of - fisher.osu.edu Fisher College of Business Working Paper Series
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Electronic copy available at: http://ssrn.com/abstract=1640552 M ANAGERIAL M ISCALIBRATION Itzhak Ben-David Fisher College of Business, The Ohio State University, Columbus, OH 43210, USA John R. Graham Fuqua School of Business, Duke University, Durham, NC 27708, USA National Bureau of Economic Research, Cambridge, MA 02912, USA Campbell R. Harvey Fuqua School of Business, Duke University, Durham, NC 27708, USA National Bureau of Economic Research, Cambridge, MA 02912, USA August 2012 We test whether top financial executives are miscalibrated using a unique 10-year panel that includes over 13,300 probability distributions of expected stock market returns. 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 the lower bound of the forecast confidence interval is lower during times of high market uncertainty; however, ex-post miscalibration is worst during these episodes. 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 appear to follow more aggressive corporate policies: investing more and using more debt financing. _________________________ We appreciate the detailed comments of Larry Katz and five anonymous referees. We also thank Hengjie Ai, Nick Barberis, Jim Bettman, Jack Bao, Audra Boone, George Constantinides, Werner DeBondt, Hui Chen, Simon Gervais, Michael Gofman, Markus Glaser, Dirk Hackbarth, Daniel Kahneman, Ulrike Malmendier, Don Moore, Justin Murfin, Terry Odean, Lubos Pastor, John Payne, Michael Roberts, Aner Sela, Hersh Shefrin, Doug Skinner, Jack Soll, Richard Thaler, Ivo Welch, and workshop participants at the AFA Annual Meeting, IDC Caesarea Center conference, MIT, NBER Behavioral Finance conference, the University of Chicago, DePaul University, Tel-Aviv University, Yale, and the Whitebox Conference for Behavioral Economics at Yale for helpful comments and suggestions. We appreciate the excellent research assistance of YeeJin Jang. All errors are our own. Disclosure: www.duke.edu/~charvey/Disclosure.htm.
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