Optimism and economic choice☆

Puri, Manju; Robinson, David T.

doi:10.1016/j.jfineco.2006.09.003

Cited by 744 publications

(481 citation statements)

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“…Puri and Robinson 2007;Campbell, Galleyer, Johnson, Rutherford and Stanley 2011), these studies and this paper do not preclude the possibility of a role for managerial overconfidence. The difficulty in distinguishing between optimism and overconfidence is further compounded by the literature itself using similar options holdings data in empirical applications.…”

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confidence: 63%

“…In turn, they are reluctant to pay dividends to shareholders. Third, optimistic and overconfident managers overinvest if they overvalue firm future earnings Tate 2005a, 2005b;Puri and Robinson 2007) and underinvest (and reject positive net present value (NPV) projects) if they have to seek external funds (Heaton 2002). Fourth, Liu and Taffler (2008) and Malmendier and Tate (2008) find that overconfident CEOs are more likely to conduct mergers and acquisitions than non-optimistic CEOs.…”

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confidence: 99%

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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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confidence: 63%

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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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“…Following Puri and Robinson (2007), we develop an indicator of dispositional optimism based on the miscalibration between subjective and objective survival probabilities. We separately analyze direct and total stock market participation, which also include stocks held in mutual funds and individual retirement accounts, at both the extensive and the intensive margin.…”

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Dispositional optimism and stock investments

Angelini

Cavapozzi

2017

Journal of Economic Psychology

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This paper analyses the relationship between dispositional optimism and stock investments. Data are drawn from the second wave of the Survey of Health, Ageing and Retirement in Europe. Dispositional optimism is found to be a relevant predictor of the ownership of stocks as well as of the share of gross financial wealth invested in this asset. The role of dispositional optimism is found to be stronger for risk tolerant agents and its relationship with the share of wealth invested in stocks varies with agents' trust. KeywordsDispositional Optimism, Household finance, Saving behaviour JEL classification: D14; G02; G11. JEL Codes D14, G02, G11

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“…Some authors, e.g. Puri and Robinson (2007) and Dominitz and Manski (2005), have found these to significantly affect participation in the stock market. Guiso et al (2008), however, do not confirm this, and find that they do not affect the coefficient on trust in a portfolio choice regression either.…”

Section: Testing the Effect Of Trust On Portfolio Choicementioning

confidence: 99%

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households*

El-Attar

Poschke

2011

Review of Finance

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Optimism and economic choice☆

Cited by 744 publications

References 41 publications

Motives for corporate cash holdings: the CEO optimism effect

Motives for corporate cash holdings: the CEO optimism effect

Dispositional optimism and stock investments

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households*

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