Managerial Optimism, Investment Efficiency, and Firm Valuation

46 Pages Posted: 18 Jun 2015

See all articles by Hung‐Ju Chen

Hung‐Ju Chen

National Taiwan University

Shin-Hung Lin

Yuan Ze University

Date Written: June 17, 2015

Abstract

This study investigates the relationship between managerial optimism, investment efficiency and firm valuation. This study follows the Campbell’s measurement for managerial optimism and investigates the influences of the different levels of managerial optimism on improving investment efficiency and firm value when firms tend to under-invest or over-invest. The results indicate that an under-invested firm with a CEO who has a higher level of managerial optimism can improve the firm’s investment efficiency by reducing the degree of underinvestment, which further increases the firm’s value. However, when firms tend to overinvest, there is insufficient evidence to show that a firm with a lower level of CEO managerial optimism will effectively improve the firm’s investment efficiency and increase firm value by reducing the degree of overinvestment.The results generated in this study help scholars and practitioners understand how managerial optimism affects the investment efficiency of firms.

Keywords: managerial optimism, investment efficiency, overinvestment, underinvestment

JEL Classification: G02, G30

Suggested Citation

Chen, Hung‐Ju and Lin, Shin-Hung, Managerial Optimism, Investment Efficiency, and Firm Valuation (June 17, 2015). Multinational Finance Journal, Vol. 17, No. 3/4, p. 295-340, 2013, Available at SSRN: https://ssrn.com/abstract=2619673

Hung‐Ju Chen (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Shin-Hung Lin

Yuan Ze University ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

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