Managerial Optimism: New Observations on the Unifying Theory

European Financial Management (2019)

18 Pages Posted: 19 Apr 2019 Last revised: 13 Jun 2019

Date Written: June 12, 2019

Abstract

Managerial optimism is behavioral finance's greatest achievement. It explains two prominent features of corporate financial behavior - over-investment and pecking order capital structure preferences - that otherwise require two different theories with mutually incompatible assumptions about managerial loyalties to shareholder-value maximization. After reviewing the development of managerial optimism as a unifying theory, I use a simple change-of-measure to transform risk-averse optimism to risk-neutral probabilities that can be pessimistic or optimistic depending on wealth changes. This unexplored feature has implications for, among other things, pay for performance when managers are excessively optimistic.

Keywords: behavioral corporate finance, managerial optimism, agency cost theory, asymmetric information theory, pay for performance

Suggested Citation

Heaton, J.B., Managerial Optimism: New Observations on the Unifying Theory (June 12, 2019). European Financial Management (2019). Available at SSRN: https://ssrn.com/abstract=3362645 or http://dx.doi.org/10.2139/ssrn.3362645

J.B. Heaton (Contact Author)

J.B. Heaton, P.C. ( email )

20 West Kinzie
17th Floor
Chicago, IL 60654
United States
(312) 487-2600 (Phone)

HOME PAGE: http://jbheaton.com

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