Does optimism affect corporate investment? New evidence from Taiwanese panel data

Abstract

We set out in this study to examine the relationship between managerial optimism and corporate investment, and demonstrate that firms with valuable investment opportunities tend to invest less than the optimal level; the classic problem of underinvestment. On the other hand, however, firms which do not have valuable investment opportunities often tend to invest more than the optimum level; a problem of overinvestment. We present evidence on the relationship between such investment behavior and managerial optimism. Within those firms that do not have valuable investment opportunities, overinvestment is more likely to occur amongst optimistic managers than non-optimistic managers; conversely, for those firms with valuable investment opportunities, underinvestment is less likely amongst optimistic managers than non-optimistic managers.