Managerial optimism and investment decision in the UK

Abstract

We investigate the impact of managerial optimism on investment decision sensitivity to cash flow. Optimists tend to overestimate returns and make overly optimistic cash flow forecasts, which leads to increased investment levels, as well as increased sensitivity of investment decision to cash flow. We use several measures of optimism and a panel of UK listed firms to confirm two hypotheses, namely that optimism increases the sensitivity of investment to cash flow, and that this sensitivity is only found in cash constrained firms. Our results are generally consistent with previous studies conducted on US firms.