Does Corporate Governance Affect Managerial Optimism? Evidence from NYSE Panel Data Firms

Abstract

Previous research in behavioral corporate finance has demonstrated that managerial optimism has an explanatory power and it can explain observed distortions in corporate decisions. What makes it special is its being a major source of investment cash flow sensitivity and it can affect the firm value since it causes overinvestment or overinvestment (Heaton in Financ Manag 31(2):33–45, 2002; Malmendier and Tate in J Financ 60(6):2661–2700, 2005a, Eur Financ Manag 11(5):649–659, 2005b; Pacific-Lin et al. in Basin Financ J 13:523–546, 2005; Huang et al. in Pac Basin Financ J 19:261–277, 2011). However the behavioral corporate finance literature is still silent about the ability of corporate governance mechanisms to affect the CEOs’ optimism bias. In this paper, we present an original essay that aims to discuss the determinants of managerial optimism by adopting a corporate governance framework. We concentrate especially on the effect of corporate governance mechanisms regarding this bias. We construct a managerial optimism using the “Net Buyer” criterion as developed by Malmendier and Tate (J Financ 60(6):2661–2700, 2005a) and we regress directly the optimism measure to some well-documented mechanisms of corporate governance. We also explore the effect of some CEO’s personal characteristics on the emergence of managerial optimism. Departing from a sample of American manufactures’ firms, we find strong evidence concerning the effect of internal corporate governance structure on managerial optimism bias.