CEO optimism and forced turnover

Campbell, Timothy; Gallmeyer, Michael; Johnson, Shane A.; Rutherford, Jessica; Stanley, Brooke

doi:10.1016/j.jfineco.2011.03.004

Cited by 618 publications

(520 citation statements)

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“…The difficulty in distinguishing between optimism and overconfidence is further compounded by the literature itself using similar options holdings data in empirical applications. 2 In this paper, we use the term optimism to maintain consistency with Campbell et al (2011), as our methodology most closely follows this earlier study. Readers, however, will still see the term overconfidence mentioned in this paper when we refer to corresponding prior studies.…”

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confidence: 99%

“…2 For instance, Campbell et al (2011) use ExecuComp's exercisable options data as the proxy for CEO optimism, which in their setting is closely related to the CEO overconfidence measure of Malmendier and Tate (2005a), who use a dataset combining stock ownership and a set of option packages provided by Brian Hall and David Yermack from Hall and Liebman (1998) and Yermack (1995). 3 In general, external financing is more expensive than internal financing for firms, particularly for financially constrained firms.…”

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“…Since managers normally own a large amount of options, which puts them in a situation of high exposure to the idiosyncratic risk of their firms, holding on to deep in-the-money options reflects a high level of optimism. 5 Influential studies that have used this measurement approach include Billett and Qian (2008), Liu and Taffler (2008), Campbell et al (2011), and Hirshleifer et al (2012).…”

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“…As emphasized by Campbell et al (2011), this should avoid the direct connection between managerial incentives and managerial compensations. We use this as a reflection of how positive a manager feels towards the firm's investment activity and its future performance.…”

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“…In further analysis, we control for any influence of debt conservatism and market conditions. As a final robustness check, we follow Campbell et al (2011) and use firm investment data to measure optimism. This is because the results of Malmendier and Tate (2005), Campbell et al (2011) and Gervais, Heaton, and Odean (2011) show that managerial optimism appears to have influence on firm investment.…”

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Motives for corporate cash holdings: the CEO optimism effect

Huang

Lambertides

Steeley

2015

Rev Quant Finan Acc

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We examine the chief executive officer (CEO) optimism effect on managerial motives for cash holdings and find that optimistic and non-optimistic managers have significantly dissimilar purposes for holding more cash. This is consistent with both theory and evidence that optimistic managers are reluctant to use external funds. Optimistic managers hoard cash for growth opportunities, use relatively more cash for capital expenditure and acquisitions, and save more cash in adverse conditions. By contrast, they hold fewer inventories and receivables and their precautionary demand for cash holdings is less than that of non-optimistic managers. In addition, we consider debt conservatism in our model and find no evidence that optimistic managers' cash hoarding is related to their preference to use debt conservatively. We also document that optimistic managers hold more cash in bad times than non-optimistic managers do. Our work highlights the crucial role that CEO characteristics play in shaping corporate cash holding policy. KeywordsCash holdings · Liquidity · Cash holdings motive · CEO optimism JEL Classification G30 · G32 · G02 2 IntroductionThe role of cash reserves in corporate financing and investment decisions is changing. Keynes (1936) Yermack (1995). 3 In general, external financing is more expensive than internal financing for firms, particularly for financially constrained firms. Biased managers are much more reluctant to use outside financing than rational managers, since they believe firm value is underestimated in the financial markets and the cost of external financing is thus overpriced. Malmendier and Tate (2005a) find that corporate investment decisions made by overconfident chief executive officers (CEOs) are substantially related to internal funds. Heaton (2002) builds a model to show that optimistic managers will decline positive NPV projects if they have to fund externally for these projects. Hackbarth (2008) shows theoretically that biased managers have higher debt levels than unbiased managers. 4Although prior studies have examined the impact of CEO optimism and overconfidence on corporate decisions, relatively few prior investigations try to determine differences between optimistic and non-optimistic managers in controlling and operating firm liquid assets (motives for cash holdings). To the best of our knowledge, the most relevant papers, though indirectly related, to a connection between CEO overconfidence and cash holdings are those of Malmendier and Tate ( who holds options more than 100% in-the-money is considered to be relatively optimistic. A detailed explanation of the CEO optimism measure is introduced in Section 3. 4 We also consider a less stringent 67% cutoff, which allows us to examine the extent of the CEO optimism effect on the motives for holding cash. This options based measure is widely used in models designed to understand managerial decision making in firms, and there is therefore value in maintaining consistency with these parallel literatures. For example, studies ...

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Motives for corporate cash holdings: the CEO optimism effect

Huang

Lambertides

Steeley

2015

Rev Quant Finan Acc

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Capital Budgeting and Other Investment Decisions

Gervais

2010

Behavioral Finance

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This chapter surveys the literature on the effects of behavioral biases on capital budgeting. A large body of the psychology literature finds that people tend to be overconfident and overly optimistic. Because of self-selection, firm managers tend to be even more affected by these biases than the general population. Indeed, the literature finds that biased managers overinvest their firm's free cash flows, initiate too many mergers, start more firms and more novel projects, and tend to stick with unprofitable investment policies longer. Corrective measures to reduce the effects of the managers' biases include learning, inflated discount rates, and contractual incentives, but their effectiveness in curbing overinvestment appears to be limited.

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CEO hubris and corporate carbon footprint: The role of gender diversity

Kwabi,

Fulgence,

Adamolekun

2024

Bus Strat Env

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This paper investigates the effect of an overconfident CEO on firm greenhouse gas emissions. Using panel data of 160,115 firm‐year observations from 41 countries for 2000–2021, we find a negative relationship between CEO overconfidence and greenhouse gas emissions. Additionally, drawing on the theories of gender socialisation and diversity, we find that great representation of females on the board further compels overconfident CEOs to reduce firm carbon emissions. Our findings are robust to varying estimation techniques and identification strategies. These findings offer important insights to green investors, corporate boards, managers and policymakers on the role of overconfident CEOs and female leadership in the carbon abatement efforts of public companies.

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CEO optimism and forced turnover

Cited by 618 publications

References 45 publications

Motives for corporate cash holdings: the CEO optimism effect

Motives for corporate cash holdings: the CEO optimism effect

Capital Budgeting and Other Investment Decisions

CEO hubris and corporate carbon footprint: The role of gender diversity

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