56 Pages Posted: 8 Oct 2008 Last revised: 18 Oct 2011
Date Written: September 1, 2010
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: 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