Financially Constrained Firms: The Impact of Managerial Optimism and Diversification on Firms’ Excess Value: The Case of Greece

Abstract

Diversification as an underlying factor of financial constraints can create several costs. Diversified firms have the tendency to over-invest in lines of business which display poor investment opportunities. Diversification indeed reduces value. This loss in value is found mainly for firms of all sizes having managers with a higher level of optimism. The link between optimism and corporate investment is more pronounced in financially constraint firms. When the wedge between the internal and external cost of funds increases, a firm is more financially constrained. Analysing a sample of listed companies in Greece it is found that the higher the managerial optimism, the lower the excess value of a firm.