 The micro and macro of managerial beliefsJournal of Financial Economics, 2022, vol. 143, issue 2, 640-667 Abstract: This paper studies how biases in managerial beliefs affect managerial decisions, firm performance, and the macroeconomy. Using a new survey of US managers I establish three facts. (1) Managers are not overoptimistic: sales growth forecasts on average do not exceed realizations. (2) Managers are overprecise: they underestimate future sales growth volatility. (3) Managers overextrapolate: their forecasts are too optimistic after positive shocks and too pessimistic after negative shocks. To quantify the implications, I estimate a dynamic general equilibrium model in which managers of heterogeneous firms use a subjective beliefs process to make forward-looking hiring decisions. Overprecision and overextrapolation lead managers to overreact to firm-level shocks and overspend on adjustment costs, destroying 2.1% to 6.8% of the typical firm’s value. Pervasive overreaction leads to excess volatility and reallocation, lowering consumer welfare by 0.5% to 2.3% relative to the rational-expectations equilibrium. These findings suggest overreaction could amplify asset-price and business-cycle fluctuations. Keywords: Managers; Beliefs; Overprecision; Overextrapolation; Adjustment costs; Reallocation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:2:p:640-667 DOI: 10.1016/j.jfineco.2021.06.007 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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