It's Not Optimism When You Know You're Right: Optimism, Attribution and Corporate Investment Policy

39 Pages Posted: 9 Dec 2015

See all articles by Richard Walton

Richard Walton

Arizona State University (ASU) - Finance Department

Date Written: September 15, 2015

Abstract

CEOs whose observed personal option-holding patterns are not consistent with theoretical predictions are variously described as overconfident or optimistic. Existing literature demonstrates that the investment and financing decisions of such CEOs differ from those of CEOs who do not exhibit such behavior and interprets the investment and financing decisions by overconfident or optimistic CEOs as inferior. This paper argues that it may be rational to exhibit behavior interpreted as optimistic and that the determinants of a CEO’s perceived optimism are important. Further, this paper shows that CEOs whose apparent optimism results from above average industry-adjusted CEO performance in prior years make investment and financing decisions which are actually similar, and sometimes superior to, those of unbiased CEOs.

Keywords: CEO optimism, CEO confidence, Self-attribution, M&A, Dividend payout, Investment sensitivity

JEL Classification: G30, G31, G34, G35, G14

Suggested Citation

Walton, Richard, It's Not Optimism When You Know You're Right: Optimism, Attribution and Corporate Investment Policy (September 15, 2015). Available at SSRN: https://ssrn.com/abstract=2698383 or http://dx.doi.org/10.2139/ssrn.2698383

Richard Walton (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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