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CEO Optimism and Forced TurnoverTimothy Colin CampbellMiami University of Ohio - Department of Finance Michael F. GallmeyerUniversity of Virginia (UVA) - McIntire School of Commerce Shane A. JohnsonTexas A&M University - Department of Finance Jessica RutherfordUniversity of South Florida Brooke StanleyWinthrop University September 1, 2010 Journal of Financial Economics (JFE), Forthcoming Abstract: We show theoretically that optimism can lead a risk-averse CEO to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the interests of shareholders, CEOs with relatively low or high optimism face a higher probability of forced turnover than moderately optimistic CEOs face. Using a large sample of turnovers, we find strong empirical support for this prediction. The results are consistent with the view that there is an interior optimum level of managerial optimism that maximizes firm value.
Number of Pages in PDF File: 56 Keywords: optimism, turnover, behavioral finance, governance JEL Classification: G30, G34 Accepted Paper SeriesDate posted: October 8, 2008 ; Last revised: October 18, 2011Suggested CitationContact Information
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