Top management team optimism and its influence on firms' financing and investment decisions

Abstract

Theory and evidence on the determinants of corporate financing and investment decisions are extensive and diverse. Apart from firm-, industry-, and time-specific factors, research also discusses the role of managers. For instance, Bertrand and Schoar (2003) identify general manager-specific effects in firm behavior. The idea is most intuitive for CEOs because they are the most prominent and visible decision-makers within a firm. Accordingly, existing research focuses on the influence of CEO characteristics on firm policies. However, CFOs and CIOs should also be expected to have an influence on cash, dividend, and capital structure policies. Findings of studies which investigate the influence of managers in specific corporate positions on different aspects of firm behavior do not fit into one big picture. For example, Bertrand and Schoar (2003) track managers across firms over time and find that CFOs (and all "other", unspecified officers) have more impact on financial decisions than CEOs. In contrast, 36%-47% of CEOs consider themselves to be the dominant decision-maker for financial and investment decisions compared to only 10%-24% of CFOs (Graham, Harvey, & Puri, 2015). This paper casts doubt on the assumption that an individual manager alone, such as the CEO, is decisive for a firm's action. We investigate the influence of managers' optimism, which is defined as a generalized positive expectation about future events. 1 Evidence shows that CEOs suffer from optimism and overconfidence and are more biased than the lay population (Graham, Harvey, & Puri, 2013). Most studies in the literature focus on the CEO because they assume that CEOs are the dominant decision-makers. However, what happens if decisions are actually made within teams? Our results indicate that corporate financial policies are driven by a collective attitude of the top management team (TMT). We find that if two or more members of the