The Spillover Effects of Management Overconfidence on Analyst Forecasts

Overconfident CEOs are known to overestimate their ability to generate returns, overpay for target firms, and take excessive risks. We find a CEO's overconfidence can also indirectly affect other market participants, specifically analysts who issue earnings forecasts. First, firms with overconfident CEOs are more likely to have analysts issue earnings forecasts that are optimistic relative to actual earnings; that is, the earnings forecasts more frequently exceed the actual realized earnings than the reverse. Second, firms with overconfident CEOs tend to have less dispersed analyst earnings forecasts. And third, smaller analyst forecast errors are associated with firms that have overconfident CEOs. These findings demonstrate the importance of CEOs' behavioral characteristics in shaping the environment in which analysts and other market participants make important financial decisions, in some cases improving the information environment