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The spillover effects of management overconfidence on analyst forecasts

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  • Kramer, Lisa A.
  • Liao, Chi M.

Abstract

Overconfident CEOs are known to overestimate their ability to generate returns, overpay for target firms, and take excessive risks. We find a CEO’s overconfidence can also indirectly affect other market participants, specifically analysts who issue earnings forecasts. First, firms with overconfident CEOs are more likely to have analysts issue earnings forecasts that are optimistic relative to actual earnings; that is, the earnings forecasts more frequently exceed the actual realized earnings than the reverse. Second, firms with overconfident CEOs tend to have less dispersed analyst earnings forecasts. And third, smaller analyst forecast errors are associated with firms that have overconfident CEOs. These findings demonstrate the importance of CEOs’ behavioral characteristics in shaping the environment in which analysts and other market participants make important financial decisions, in some cases improving the information environment.

Suggested Citation

  • Kramer, Lisa A. & Liao, Chi M., 2016. "The spillover effects of management overconfidence on analyst forecasts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 12(C), pages 79-92.
    • Handle: RePEc:eee:beexfi:v:12:y:2016:i:c:p:79-92
    DOI: 10.1016/j.jbef.2016.10.004
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    Cited by:

    1. Jochen Becker & Josip Medjedovic & Christoph Merkle, 2019. "The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias," The Financial Review, Eastern Finance Association, vol. 54(1), pages 133-164, February.
    2. Jeon, Heung-Jae, 2023. "CEO overconfidence: A dual-detriment to investment-price sensitivity via market negligence and reduced informed trading," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    3. Mike Eom & Mookwon Jung & Jung Chul Park, 2023. "Are overconfident CEOs better able to transform innovation into firm value?—Evidence from the United States," International Finance, Wiley Blackwell, vol. 26(2), pages 241-258, August.
    4. Hilgert, Lara Katharina, 2020. "The Effect of Perceived CEO Overconfidence on Consumers' Product and Brand Evaluations," Junior Management Science (JUMS), Junior Management Science e. V., vol. 5(3), pages 371-391.

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