Dissecting managerial overconfidence
I present out-of-sample tests of the association between managerial overconfidence and firm-level investment decisions and find that most prior results do not hold during my sample period. I develop alternative, language-based proxies of overconfidence and its varied manifestations: optimism (mean overestimation), miscalibration (variance underestimation), and the illusion of control. I present evidence that different aspects of overconfidence are associated with different outcomes documented in the literature. Optimism is more strongly associated with capital investment and acquisitiveness, while miscalibration is more strongly associated with aggressive research and development expenditures.
Hwang, Purdue University.
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