TY  - JOUR
AU  - Ben-David,Itzhak
AU  - Graham,John R.
AU  - Harvey,Campbell R.
TI  - Managerial Overconfidence and Corporate Policies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13711
PY  - 2007
Y2  - December 2007
UR  - http://www.nber.org/papers/w13711
L1  - http://www.nber.org/papers/w13711.pdf
N1  - Author contact info:
Itzhak Ben-David
Fisher College of Business
The Ohio State University
2100 Neil Avenue
Columbus, OH 43210
Tel: 773-988-1353
E-Mail: bendavid@fisher.osu.edu

John Graham
Duke University
Fuqua School of Business
100 Fuqua Drive
Durham, NC 27708-0120
Tel: 919/660-7857
Fax: 919/660-8038
E-Mail: john.graham@duke.edu

Campbell R. Harvey
Duke University
Fuqua School of Business
Durham, NC 27708-0120
Tel: 919/660-7768
Fax: 919/660-8030
E-Mail: cam.harvey@duke.edu
AB  - 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.
ER  -