Do Managers Always Make Optimal Investment Decisions: Relationship between Managerial Optimism Measured by BERT and Investment Decision-making

Abstract

This paper aims to investigate the effect of managerial optimism on corporate investment and performance. BERT’s methodology, a machine learning method developed by Google, was used to measure managerial optimism for companies listed on KSE (Korea Stock Exchange) and KOSDAQ from 2009 to 2019. Optimism, when there are capital constraints of companies, is defined as overconfidence, and unlike previous studies, the meaning of managerial optimism and overconfidence is distinguished. The empirical analysis revealed the following: higher the manager’s optimism, higher the cash flow, smaller the size of the firm, larger the debt ratio and lastly, higher the growth potential, higher the investment. Furthermore, in analyzing the relationship between performance and investment, higher optimism and investment was associated with higher corporate performance. Finally, when a company is in a capital constraint state, it was found that managerial optimism negatively affected corporate performance. These findings are consistent with previous studies that showed that more optimistic managers have higher investment and that excessive optimism is not good for corporate value.