Week 3 - Ben-David, Graham and Harvey (2013).

Question 1

What is the main idea of this paper?

Answer 1

• The paper investigates the miscalibration of managers, can be defined as the systematic underestimation of the range of potential outcomes (excessive confidence).
• Either managers overestimate their ability to predict the future, or they underestimate the volatility of random effects.
• CFO survey regarding the S&P500 returns, (1) estimate the annual return; (2) estimate the annualized forecast over the next 10 years.
• Then they link the miscalibration of CFOs to their corporate actions, (1) confidence interval of IRR estimation; (2) intensity of corporate spending (CapEx); (3) corporate debt policy
• CFO confidence intervals converted into volatility estimates, by using the following formula, x(0.9) and x(0.1) are the 90th and the 10th percentiles of the respondents distribution, Z is the standard deviation within the interval.

Question 2

What are the main research questions?

Answer 2

1)Are CFOs miscalibrated? Measure the narrowness of their distribution of predicted future
returns.
2) Does overprecision spread to corporate planning and forecasting?
3) What is the effect of miscalibration on corporate investments and leverage?

Question 3

What is CFO market miscalibration associated with in the paper?

Answer 3

1 Greater miscalibration in forecasting own-project return (measured based on survey response forecasting internal rate of return).
2 More intense corporate investment.
3 Higher leverage.

Question 4

What is the summary of this paper?

Answer 4

• CFOs are severely miscalibrated.
• Confidence intervals are wider in periods of high market-wide uncertainty, but during these
  periods CFOs are even more miscalibrated
• CFO overprecision is related to corporate decision making; the miscalibration is positively
  correlation with overprecision in own-firm investment return predictions. Moreover, firms
  with miscalibrated or optimistic executives invest more and have more debt, on average.
• This all has implications for investors, regulators, and other stakeholders.