Human estimation and inference are subject to systematic biases such as overconfidence and over-optimism. In contrast to prior research that has identified multiple negative consequences of these biases, we focus on positive effects. We empirically examine a setting in which over-optimism a) is a related but different bias from overconfidence, b) emerges dynamically in a rational economic framework, and c) generates higher managerial effort. Importantly, this additional effort improves firm profitability and market value.
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We gratefully acknowledge the helpful comments and suggestions made by Sudipta Basu (the referee), Nicole David, Denis Gromb, Kai Wai Hui, Tiphaine Jerome, S.P. Kothari (the editor), Vikas Mehrotra (the discussant at the 2014 Accounting and Finance Research Forum), Kirill Novoselov, Terry Walter, Guochang Zhang, and workshop participants at Fudan University, Hong Kong University of Science and Technology, INSEAD, National University of Singapore, Shanghai Jiaotong University, University of Western Australia, and Xiamen University. We thank Jianghua Shen for research assistance. Hsu acknowledges financial support from the Hong Kong Research Grants Council (HKUST641410; FSGRF13BM02).
© 2016 Elsevier B.V.
- Firm performance
- Managerial effort