/ Underestimate the risk, Make upward biased cash flow forecasts, Exercise real options earlier Overinvestment Believe their stock is undervalued in capital market, Avoid external financing / Prefer internal cash (likely) Underinvestment Keiichi Shima (C)
overconfidence proxy Classify firms as overconfident if they have more upward- biased forecasts than downward-biased forecasts over past 5 years Employ ex-ante and ex-post measures of upward-bias of earnings forecasts to construct our managerial overconfidence proxy Keiichi Shima (C)
= 1, i.e., firms missed their previous forecasts and think that their earnings will increase this period Averaging −1 for the past five years: = =0 4 − −1− /5 OC dummy if OCindex>.5 Keiichi Shima (C)
earnings in reflecting economic losses relative to economic gains _ = መ 1 + መ 2 + መ 3 + መ 4 log of equity market value, market to book value of equity, long- and short-term debt/equity market value Keiichi Shima (C)
calculated as the average growth rate of real sales over the past five years σit is calculated as the standard deviation of the real sales growth over the past five years Keiichi Shima (C)
price and management earnings forecasts: NEEDS FinancialQuest Estimation period between April 2000 and March 2015 All variables winsorized at 1 and 99 percent (25,856 firm- year observations) Keiichi Shima (C)