Friday, June 17, 2011

Overconfident CEOs and Earnings Forecasts

Executives must have confidence to succeed, but how much is too much?   How specifically does overconfidence affect organizational actions?   Wharton Professor Holly Yang and Iowa Professor Paul Hribar have written an interesting new paper regarding CEO overconfidence.   They examined 974 CEOs from Fortune 500 firms in the 2000-2007 time period.  They first examined the extent to which the CEOs were overconfident, based on descriptions and quotes in news articles, press releases, etc.  Then they examined those firms' earnings forecasts.  Yang describes their findings: "We found that if a CEO is classified as overconfident, then his or her chance of missing the forecast is 10% higher than for a manager who is less confident."  The authors wrote in their paper: "Overconfident CEOs are more likely to issue optimistically biased forecasts because they overestimate their ability to affect their financial results and/or they underestimate the probability of random events."  

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