Managerial Optimism Research Articles

Exploring the predictive ability of cost asymmetry on bankruptcy

This study explores whether cost asymmetry affects bankruptcy predictions. Cost asymmetry, driven by adjustment costs, empire-building behaviours, and managerial optimism, can reduce resource availability, liquidity, and earnings predictability, thereby increasing the risk of liquidity issues and potential bankruptcy. High cost asymmetry implies additional financing needs due to idle resources, which are less likely (or more costly) to be covered by retained earnings or capital market funds. Furthermore, elevated cost stickiness driven by intense empire-building consumes valuable resources and signals weaker governance and auditing efficiency, while increased managerial optimism heightens the risk to future operating performance. Using a sample of US publicly listed firms over the period 1990–2020, we provide empirical evidence that the level of cost asymmetry is incrementally useful for bankruptcy prediction. The fundamental factors of cost asymmetry, including adjustment costs and managerial incentives, reinforce its predictive ability to corporate bankruptcy. Additional robustness tests confirm our empirical results across (i) fluctuations in sales revenue, (ii) the effects of financial constraints on cost asymmetry, (iii) managerial and firm-specific characteristics, and (iv) propensity score-based partitioned samples.

The effects of manager sentiment in financial disclosure: Perspectives of operational efficiency and market reaction

This study constructs a measure of managerial optimism using textual and nonparametric estimation methods, exploring its impact on company operational efficiency and market reactions. Findings indicate that managerial optimism positively influences stock price returns over the subsequent year by enhancing internal operational efficiency and reducing analyst forecast dispersion, with a more pronounced effect in state-owned enterprises. Utilizing information from the MD&A (Manager Discussion and Analysis) section of annual reports, this research demonstrates the role of managerial optimism in company operations and market reactions, offering empirical evidence for corporate behavioral finance research and practical implications for management practice.

Moderating role of managerial optimism on the relationship between macroeconomic uncertainty and capital structure decisions

Moderating role of managerial optimism on the relationship between macroeconomic uncertainty and capital structure decisions

Moderating role of managerial optimism on the relationship between macroeconomic uncertainty and capital structure decisions

Moderating role of managerial optimism on the relationship between macroeconomic uncertainty and capital structure decisions

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

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.

The bright side of the planning fallacy in distribution channels

The planning fallacy describes the tendency of people to underestimate the costs and to overestimate the benefits of investments. It is typically associated with cost overruns and decreased performance. In this paper, we demonstrate that in a simple distribution channel with an upstream manufacturer and a downstream retailer that both make demand-enhancing investments, there is a bright side of the planning fallacy: managerial optimism bias that results in underestimated investment costs can in fact lead to a win-win outcome which makes the manufacturer, the retailer, and consumers better off than without bias. Moreover, the total profit of the decentralized distribution channel can be even higher than the centralized channel’s profit. We find that our results are robust to changes in the sequencing of decisions and continue to hold under generalized Nash bargaining over the wholesale price as well as under upstream or downstream competition or consumer demand uncertainty.

Collection responsibility and freight insurance strategies for an e‐tailing supply chain in the presence of managerial optimism

AbstractEntrepreneurs are usually optimistic when they offer return policies. We investigate the strategic interaction between the manufacturer's collection responsibility strategy (returns handled by the manufacturer or the e‐tailer) and the e‐tailer's complimentary return‐freight insurance strategy (whether to offer this insurance or not) in the presence of managerial optimism. It is found that the manufacturer's collection responsibility strategy creates the (implicit) incentive for the e‐tailer to offer complimentary return‐freight insurance. A high level of optimism and return handling costs expand the equilibrium range over which the manufacturer collects returns, and the e‐tailer offers complimentary return‐freight insurance. Contrary to conventional wisdom, we find that unilateral optimism does not always lead to a win‐win situation, but it can still result in suboptimal results on the other side. Finally, despite possibly high shipping costs, the e‐tailer's refusal to offer complimentary return‐freight insurance still benefits consumers, implying that managers with high optimism level benefit consumers.

Managerial Beliefs and Banking Behavior

Abstract We use a large sample of US banks to construct a new indicator of managerial beliefs based on bank provisioning. This indicator does not only anticipate a future charge-off but also explains future loan growth and other variables. In particular, the indicator shows that an increase in managerial optimism (pessimism) leads to expanded (tight) lending, leverage, and a riskier (less risky) portfolio. Our findings confirm that widespread managerial optimism (pessimism) prevailed before (during) the 2007-2008 financial crisis and that changes in managerial beliefs played an important role in the lending and leverage cycles.

Managerial confidence and capital structure announcement effects on share prices on the Johannesburg Share Exchange

Background: In an attempt to enhance our understanding of the important determinants of the debt–equity choice, there is a need to explore the behavioural facets driving the decision to issue either debt or equity. Furthermore, the divergent set of implications of equity and debt issues on the share prices are empirical matters that need to be addressed.Aim: In this article the link is investigated between managerial confidence and the likelihood of issuing debt, as well as the share price implications of equity and debt issue announcements on the Johannesburg Share Exchange (JSE).Setting: The study is based on the equity bond issue announcements of JSE-listed firms for the period 2000–2020.Method: In this article, panel data regression and event study approaches are used in a sample of 81 and 113 bond and equity issue announcements, respectively, for 69 firms listed on the JSE.Results: The main findings of this article indicate that managerial optimism drives debt issuing activities on the JSE and that there are negative and significant abnormal returns associated with the announcement of equity issues.Conclusion: Overall, we conclude that behavioural finance is an important factor driving capital structure decisions, and that signalling, as well as market-timing concerns drive share price reactions on the JSE.Contribution: This article highlights the importance of behavioural factors in capital structure decisions and identifies the firm-specific channels through which managerial optimism drives leverage. Additionally, the article sheds light on the role of signalling and market timing in capital structure decisions.

Strategies for the retail platform to counteract match uncertainty: Virtual showroom and return or exchange policy

In a duopoly market consisting of a brick-and-motor (BM) store and a retailer platform, we explore strategies for the platform to counteract product match uncertainty. Three counteractive strategies are proposed: introducing virtual showrooms, offering a full-refund return policy and offering an exchange policy. Accordingly, duopoly competitive models are constructed to examine the roles of these strategies in mitigating product match uncertainty. In addition, the interaction among these three counteractive strategies is also explored. Results show that: these three strategies have positive effects on the platform’s demands but adverse effects on BM store’s. Both the full-refund return policy and the exchange policy can benefit the platform, especially the exchange policy. Nevertheless, whether introducing virtual showrooms can benefit the platform mainly relies on the establishing cost. In most cases, it is more advisable for the platform to offer an exchange policy rather than a full-refund return policy. Generally, introducing virtual showrooms and offering a return policy (an exchange policy) are two complementary methods, but the refund return policy can be seen as a replaceable measure for the exchange policy. In extensions, we explore the impacts of endogenous signal accuracy, managerial optimism and the partial-refund return policy. Several findings are also achieved: it is always beneficial to establish virtual showrooms if the platform can endogenously determine the accuracy of the information disclosed by the virtual showroom. Compared with managerial pessimism, managerial optimism generates more profits for the platform. A generous return policy leads to a higher selling price and greater profits for the platform.

CEO–CFO team optimism: Commercial real estate transactions and REIT performance

AbstractThe managerial optimism literature concentrates on CEOs neglecting other executive team members. We evaluate the interplay of the optimism levels of the CEOs and CFOs of real estate investment trusts, and study their commercial real estate transactions. We find that firms led by optimistic CEO/CFO teams pay 3% more than their peers for their asset acquisitions if cash ratio increases by one percentage point. Our findings also exhibit inferior stock performance by optimistic teams following a transaction. Conversely, diversity in terms of CEO/CFO optimism prevents firms from overpaying, serving as a soft governance mechanism with salience to firm performance.

Investor Sentiment and Corporate Investment Behavior——Based on the Suppressing Effect of Managers Optimism

With the rise of behavioral finance, many studies have gradually begun to focus on the influence of investors' and managers' irrational psychology in corporate finance, such as the influence of managers' overconfidence on corporate investment, and such as investors' herd mentality in the capital market, which lead them to make investment decisions that deviate from the theoretically optimal ones, thus leading to inefficient investment behavior. In this paper, 395 A-share listed companies are selected as the research objects and the research years are from 2015 to 2020, and investor sentiment, managerial optimism and corporate investment behavior are included in the same framework to explore the relationship between these three and what role managerial optimism has in the relationship between investor sentiment and corporate investment behavior, and the study finds that both investor sentiment and managerial optimism have a positive effect on corporate. The study finds that both investor sentiment and managerial optimism have positive effects on firms' investment behavior; investor sentiment and managerial optimism are negatively related; and managerial optimism plays the role of masking effect in the process of investor sentiment affecting firms' investment behavior.

Managerial Over‐Optimism and Research and Development Investment: Evidence from Korean Initial Public Offering Firms*

AbstractExamining 1114 Korean firms between 2001 and 2015, we find that positive discretionary research and development expenditures in initial public offering years positively relate to future investment but do not significantly affect future performance. Thus, managerial optimism rather than signaling likely drives over‐investment. High‐tech firms generally over‐invest more, and those that over‐invest are more likely to delist within 5 years. Future research and development expenditures are positively associated with future operating and stock performance only for high‐tech firms with low discretionary research and development expenditures around initial public offerings. Successful initial public offerings may create over‐confidence, resulting in inefficient expenditures.

Managerial Optimism and Debt Covenants

ABSTRACTThis paper studies the effects of managerial optimism on the optimal design of debt covenants. We find that managers who are more optimistic about the future success of their investment ideas provide lenders with greater control rights via tighter covenants. This is optimal for optimistic managers even though they understand that tighter covenants increase the probability of covenant violations and lead to excessive lender intervention. The broad reason for this result is that optimists wish to write contracts that repay lenders more frequently in bad states rather than in good states, and the only way to achieve this is by granting lenders more control rights. Our model generates new predictions and offers a novel explanation for the empirical evidence that covenants in debt contracts are set very tightly and are often violated.

Cash Holding and Firm Value in the Presence of Managerial Optimism

Cash holding is important for Chinese manufacturing firms coping with the increasing costs of financing and tough economic conditions. This study examines the impact of cash holding on the firm value of Chinese manufacturing businesses. We found evidence that a non-linear relationship exists between cash holding and firm value in these companies. The study reveals that a higher level of cash holding in financially constrained firms negatively affects the firm value, while unconstrained firms with a less cash holding level have a better firm value. Finally, this research is enriched by implementing the novel measure of managerial optimism. Revealed is the interactive role of cash holding and optimism and how they affect firm value. The study concludes that managerial optimism influences a firm’s cash holding decisions, and this is more costly for unconstrained firms.

Investigating the fiscal motive of state incentives for innovative and investment activity

The object of research is the state as an economic agent of innovative development. The analysis of scientific achievements on the issue of the state innovation and investment activity stimulation and the study of the state from the standpoint of the innovative development subject forms a fairly clear idea about the mechanisms of activation of them both, at the same time, the motives for the state to stimulate innovation remain not fully covered.
 The state itself is not interested in stimulating the innovation and investment processes and in transition to sustainable development. This interest is mediated, as for any other economic agent, by imbalance and/or obtaining additional economic effect in the form, for example, budget expenditures reduction; tax revenues growth, managerial staff optimization, etc. And, crucialness of purely liberal nature of any controlled influence on the system mediates that state regulatory activity should be based on the economic benefit of the agent, as opposed to the political motives of nominal adherence to the generally accepted course of development.
 Well-known trajectories and patterns of administrative and economic activity of the state give grounds to assume the following main economic motives for stimulating the innovation process:
 – increase in tax revenues (fiscal motive);
 – reducing the burden on the budget;
 – GDP growth;
 – increasing the country's competitiveness;
 – optimization of administrative costs and management staff;
 – attracting program financing and investments.
 Prominent among which is the increase in tax revenues or fiscal motive. It can result in several areas:
 – from the standpoint of additional taxes due to the increase in effectiveness of legal entities innovative activity – the expansion of business activities; types and volumes of sales of products and services; increase in the number of enterprises; increase in the cost of sold products; profitability, etc.;
 – from the standpoint of additional taxes due to better development of the workforce – higher employment; higher wages, etc.

Managerial optimism and investment decision in the UK

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.

Managerial optimism and corporate investment behavior

This study aims to analyze if managerial optimism affects corporate investment behavior. We measure managerial optimism by directly surveying CFOs and executives responsible for corporate investments of listed companies in Japan. We show that capital investment is higher when managers are optimistic. When we combine our survey data of Japanese managers with comparable cross-country data, we find that companies located in countries with highly optimistic managers invest more actively. This implies that managerial optimism not only partly explains differences of corporate behaviors in a country, but also those among countries.

Managerial optimism, investment cash flow sensitivity and agency costs: Evidence from NYSE panel data firms

This study deals with a new survey for the relationship between CEO optimism and investment cash flow (ICF) sensitivity in presence of asymmetric information and agency costs problems. In this paper, we conduct an empirical study of ICF among NYSE manufacture firms during the period 1999–2010. Our results report that the ICF sensitivity exists and is significant especially for firms that run agency costs. This result is robust to a battery of different model including alternative assumptions and different methodologies based on Adjusted Q-model and Euler equation model. For another set of tests, we demonstrate that a large blockholders holding may succeed to reduce investment cash flow caused by CEOs optimism bias.

Optimism and profit-based incentives in cost stickiness: an experimental study

This study aims to examine whether managerial optimism and profit-based incentives affect cost behavior asymmetry, especially cost stickiness. Differ from previous literature on cost stickiness, the researchers use an experimental 2 × 2 between-within subjects factorial design. This design allows us to use data related to cost management specifically, not just in general term as in studies using archival data from public financial statements. Our study results reaffirm cost stickiness literature. This study focuses on experiments among accounting students who are not knowledgeable about cost behavior asymmetry. Even though our 71 student participants know only the symmetric cost behavior theory, when presented with a scenario related to sales prospects and information on profit-based incentives, the results of this study show otherwise. When participants are more optimistic and profit-based incentives have been achieved, the level of cost stickiness is also higher.