A tale of two biases: Unpacking the relationship of overestimation and overprecision on firm performance

Deskripsi

Overconfidence is widely known to influence firm decision-making. Yet there remains confusion regarding the concept because it comprises three key aspects: overplacement, overestimation, and overprecision. Using archival data, we employ a firm-level overconfidence construct to simultaneously analyze the impacts of both overestimation and overprecision. Based on proxies derived from management earnings guidance, overestimation has a sizeable, negative impact on firm performance that is uncorrelated with overprecision's sizeable, positive impact. The result that emerges is surprisingly large: more than one third of a firm's asset value can be explained by these combined