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CEO Optimism and Forced Turnover

56 Pages Posted: 8 Oct 2008 Last revised: 18 Oct 2011

T. Colin Campbell

University of Cincinnati - Department of Finance - Real Estate

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Shane A. Johnson

Texas A&M University - Department of Finance

Jessica Rutherford

University of South Florida

Brooke Stanley

Winthrop University

Date Written: September 1, 2010

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.

Keywords: optimism, turnover, behavioral finance, governance

JEL Classification: G30, G34

Suggested Citation

Campbell, T. Colin and Gallmeyer, Michael F. and Johnson, Shane A. and Rutherford, Jessica and Stanley, Brooke, CEO Optimism and Forced Turnover (September 1, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1280410

Timothy Colin Campbell

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

Jessica Rutherford

University of South Florida ( email )

Tampa, FL 33620
United States

Brooke Stanley

Winthrop University ( email )

Rock Hill, SC 29733-0001
United States

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