The following post comes to us from Itzhak Ben-David, Assistant Professor of Finance Department at the Ohio State University; John Graham, Professor of Finance at Duke University; and Campbell Harvey, Professor of Finance at Duke University.
In the paper, Managerial Miscalibration, which was recently made publicly available on SSRN, we study whether top corporate executives are miscalibrated as well as the determinants of their miscalibration. Miscalibration is a form of overconfidence examined in psychology, economics, and law. Although it is often analyzed in lab experiments, there is scant evidence about the effects of miscalibration in practice.
Over the past nine years, we collected over 11,600 S&P 500 forecasts as well as 80% confidence intervals from Chief Financial Officers. The width of the confidence interval gives us a measure of miscalibration. Importantly, the CFOs are forecasting a common market-wide measure. This allows us to exploit cross-sectional heterogeneity in both optimism and miscalibration. By comparing forecasts to realizations over many periods, we also present a simple measure of miscalibration.