Working Paper: NBER ID: w16215
Authors: Itzhak Bendavid; John R. Graham; Campbell R. Harvey
Abstract: 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.
Keywords: miscalibration; executive behavior; corporate policies
JEL Codes: G30; G31; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CFO miscalibration (G40) | corporate investment policies (G38) |
| CFO miscalibration (G40) | aggressive corporate policies (L49) |
| miscalibrated executives (M12) | higher levels of debt financing (G32) |
| market uncertainty (D84) | CFO miscalibration (G40) |
| CFO miscalibration (G40) | narrow probability distributions (C46) |