Abstract
We report a surprising finding where one-third of a firm’s asset value is explained by the overconfidence of the group making the firm’s strategic decisions. This result emerges from an empirical analysis of a group-level overconfidence construct and its impact on firm performance using a real-world data set. Our overconfidence construct examines the behavior of the group, not just the CEO, and it allows us to simultaneously analyze the impact of two facets of overconfidence – overestimation and overprecision bias. Using proxies derived from management earnings guidance we find that overestimation has a sizeable, negative impact, which is uncorrelated with overprecision’s sizeable, positive impact on firm performance, and we show that these relationships are plausibly causal.
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