Managerial Overextrapolation: Who and When

Corporate managers overextrapolate past earnings in their earnings guidance, and this behavior is robust after including extensive controls, such as expectation management, earnings management, and overconfidence. The degree of overextrapolation is driven by the persistence of the underlying earnings process and other factors that affect representativeness heuristics, including trend, salience, and volatility. Experience and value diversity among corporate managers help mitigate this bias, whereas demographic diversity does not. Using the Tax Cuts and Jobs Act of 2017, we provide causal evidence that managers overextrapolate past earnings. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00901 .