Managerial Optimism and Corporate Investment: Is the CEO Alone Responsible for the Relation?

45 Pages Posted: 5 Mar 2008 Last revised: 31 Oct 2008

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Philipp Schäfers

WestLB

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: October 30, 2008

Abstract

Why should aggregate investment of large conglomerates depend on personal characteristics of one single person, the CEO? In reality, corporate investment decision processes are complex. Are personal characteristics of all senior managers together perhaps a better predictor of corporate decisions than the CEOs' characteristics alone? This is the question we tackle in this paper empirically for the case of managerial optimism and corporate investment. In contrast to existing empirical studies we do not only focus on optimism measures of single managers like the CEO or CFO of a firm as investment decisions of firms are usually not made by only one single person. Instead, our optimism measure is based on the insider stock transaction behavior of all senior managers that they have to report to the German Federal Financial Supervisory Authority. This paper is thus the first paper which compares the relative influence of CEO or CFO optimism compared to the optimism of all important managers. The main results can be summarized as follows. Managers are optimistic. Managers voluntarily increase their exposure to company specific risk more often than they reduce it, although they should, if anything, reduce their exposure. Furthermore, we find that firms with optimistic managers invest more. Moreover, the investment-cash flow sensitivity is higher for firms with optimistic managers. Consistent with theory, these results are stronger for financially constrained firms. As new insights, we find that optimism of all insiders has also explanatory power when compared to pure CEO optimism and that the higher managerial optimism, the lower the excess value of a company. We also identify moderating variables that determine when the CEO is more relevant for corporate investment (firm size, corporate governance, type of investment). CFO optimism has no explanatory power. These findings show that it is crucial to analyze how the exact decision process works within a firm.

Keywords: Optimism, corporate investment, investment-cash flow sensitivity, behavioral corporate finance

JEL Classification: G14, G31, G32, D80

Suggested Citation

Glaser, Markus and Schäfers, Philipp and Weber, Martin, Managerial Optimism and Corporate Investment: Is the CEO Alone Responsible for the Relation? (October 30, 2008). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=967649 or http://dx.doi.org/10.2139/ssrn.967649

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

Philipp Schäfers

WestLB ( email )

Herzogstrasse 17
Düsseldorf, 40217
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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