Managerial Optimism and Corporate Investment : Is the CEO Alone Responsible for the Relation?

Glaser, Markus ; Schäfers, Philipp ; Weber, Martin

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URN: urn:nbn:de:bsz:180-madoc-18021
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: Working papers / Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre
Volume: 153
Place of publication: Mannheim
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: D80 G32 G31 G14 ,
Subject headings (SWD): Kapitalanlage , Konzern , Optimismus , Cashflow , Finanzierung
Keywords (English): Optimism , corporate investment , investment-cash flow sensitivity , behavioral corporate finance
Abstract: Why should aggregate investment of large conglomerates depend on personal characteristics of one single person, the CEO? In reality, decision processes are complex. Are personal characteristics of all senior managers together perhaps a better predictor of corporate decisions than the CEOs' characteristics alone? This is the question we tackle in this paper empirically for the case of managerial optimism and corporate investment. In contrast to existing empirical studies we do not only focus on optimism measures of single managers like the CEO or CFO of a firm as investment decisions of firms are usually not made by only one single person. Instead, our optimism measure is based on the insider stock transaction behavior of all senior managers that they have to report to the German Federal Financial Supervisory Authority. The main results can be summarized as follows. Managers are optimistic. Managers voluntarily increase their exposure to company specific risk more often than they reduce it, although they should, if anything, reduce their exposure. Furthermore, we find that firms with optimistic managers invest more. Moreover, the investment-cash flow sensitivity is higher for firms with optimistic managers. Consistent with theory, these results are stronger for financially constrained firms. As new insights, we find that optimism of all insiders has also explanatory power when compared to pure CEO optimism and that the higher managerial optimism, the lower the excess value of a company. We also identify moderating variables that determine when the CEO is more relevant for corporate investment (firm size, corporate governance, type of investment). CFO optimism has no explanatory power. These findings show that it is crucial to analyze how the exact decision process works within a firm.
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