The Perception of Control and the Level of Overconfidence: Evidence from Analyst Earnings Estimates and Price Targets

Behavioral Governance and Self-Conscious Emotions: Unveiling Governance Implications of Authentic and Hubristic Pride

“…Over time, the dark facet of the concept of pride started to be applied in other organizational frameworks such as entrepreneurial ventures (Hayward et al, 2006) and investment banks (Stotz and von Nitzsch, 2005), with the purpose of explaining a broader variety of managerial decisions, including those related to market entry (Camerer and Lovallo, 1999) and sources of investment financing (Malmendier and Tate, 2005). Thus, it was shown that overconfident entrepreneurs tend to pursue unsuccessful efforts associated with the development of uncertain technologies (Lowe and Ziedonis, 2006), involve in risky product introductions that are less likely to succeed (Simon and Houghton, 2003), and deprive their ventures of needed resources and lead them to failure (Hayward et al, 2006).…”

“…Malmendier and Tate (2005) found that executive hubris accounted for investment distortion, inducing corporations to rely more on internal rather than external financing. Studies conducted in the context of investment banks reported that financial analysts' overconfidence intensified with stronger perceptions of control (Stotz and von Nitzsch, 2005) and prior successful earnings forecasts, resulting in less accurate and further from the consensus future predictions (Hilary and Menzly, 2006).…”

“…Subjects neglect the quality of competition and their (excess) entry into the industry results in a failure Simon and Houghton (2003) 55 executives of small computer firms in Georgia Leads to risky product introductions that are less likely to succeed (although managers expressed extreme certainty about achieving success) Malmendier and Tate (2005) 477 US firms (1984)(1985)(1986)(1987)(1988)(1989)(1990)(1991)(1992)(1993)(1994) Is proxied by holding in-the-money options and accounts for corporate investment distortion (rely on internal rather than external financing) Stotz and von Nitzsch (2005) 147 analysts at 9 investment banks (in 2002) A stronger perception of control increases financial analysts' overconfidence with regard to earnings forecasts Hayward et al (2006) N/A (conceptual) Entrepreneurs with socially constructed overconfidence deprive their ventures of resources, increasing the odds of their failure Hilary and Menzly (2006) 46909 quarterly earnings forecasts by analysts (1980)(1981)(1982)(1983)(1984)(1985)(1986)(1987)(1988)(1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997) More accurate earnings' prediction in the past leads to analysts' overconfidence in their ability to forecast future earnings, resulting in subsequently less accurate and further from the consensus forecasts Doukas and Petmezas (2007) 5334 UK acquisitions (1980-2004) Stems from self-attribution bias and leads to lower acquisition announcement returns and poor bidders' long-term performance Malmendier and Tate (2008) 394 US firms …”

Does uncertainty boost overconfidence? The case of financial analysts' forecasts

“…They show that, after a short series of good predictions, analysts are more likely to be inaccurate and to take additional risks by deviating from the consensus. Stotz and Von Nitzsch (2005) directly questioned analysts about their personal judgments regarding the quality of their forecasts and observed that, on average, analysts believe that their earnings forecasts are better than those of their colleagues. Beshears and Milkman (2011) document the escalation of Case of financial analysts' forecasts commitment when an analyst makes an out-of-consensus forecast and suggest that it could be closely related to overconfidence.…”

Equity Analyst Recommendations: A Case for Affirmative Disclosure?

“…Numerous studies contend that analysts become overconfident and overweight their ability to identify superior investment opportunities (Massey and Thaler 2005;Odean 1998;Stotz and von Nitzch 2005). Analysts tend to overestimate the likelihood that positive past performance predicts positive future performance (DeBondt and Thaler 1985;Shefrin and Statman 1995;Solt and Statman 1989) while also proving far more likely to follow popular stocks that are highly rated by Standard and Poor's (Chung 2000;Jegadeesh and Kim 2006).…”