Using a unique 10-year panel that includes more than 13,300 expected stock market return probability distributions, 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 executives reduce the lower bound of the forecast confidence interval during times of high market uncertainty; however, ex post miscalibration is worst during periods of high uncertainty. 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 seem to follow more aggressive corporate policies: investing more and using more debt financing.
We appreciate the detailed comments of editor 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, John Lynch, 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. Ben-David's research is supported by the Neil Klatskin Chair in Finance and Real Estate. We appreciate the excellent research assistance of Joy Tianjiao Tong and YeeJin Jang. All errors are our own. Disclosure: www.duke.edu/~charvey/Disclosure.htm. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
tzhak Ben-David, John R. Graham, Campbell R. Harvey , 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1547-1584. citation courtesy of