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CEO optimism and forced turnover

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Author Info

  • Campbell, T. Colin
  • Gallmeyer, Michael
  • Johnson, Shane A.
  • Rutherford, Jessica
  • Stanley, Brooke W.

Abstract

We show theoretically that optimism can lead a risk-averse Chief Executive Officer (CEO) to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the interests of shareholders, CEOs with relatively low or high optimism face a higher probability of forced turnover than moderately optimistic CEOs face. Using a large sample of turnovers, we find strong empirical support for this prediction. The results are consistent with the view that there is an interior optimum level of managerial optimism that maximizes firm value.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 3 (September)
Pages: 695-712

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:3:p:695-712

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: CEO turnover Optimism Overconfidence Managerial biases;

References

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Citations

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Cited by:
  1. Wang, Jian & Sheng, Jiliang & Yang, Jun, 2013. "Optimism bias and incentive contracts in portfolio delegation," Economic Modelling, Elsevier, vol. 33(C), pages 493-499.
  2. Dah, Mustafa A. & Frye, Melissa B. & Hurst, Matthew, 2014. "Board changes and CEO turnover: The unanticipated effects of the Sarbanes–Oxley Act," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 97-108.
  3. Ezzeddine Ben Mohamed & Baccar Ame & Abdelfatteh Bouri, 2013. "Investment Cash Flow Sensitivity and Managerial Optimism: A Literature Review via the Classification Scheme Technique," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 5(1), pages 007-026, June.

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