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When optimism hurts: Managerial expectations and investment inefficiency

Author

Listed:
  • Xing, Licong
  • Qiu, Guchuan
  • Chen, Xuezhen
  • Zhang, Yaoyi

Abstract

Managerial cognitive biases critically affect corporate investment decisions. Unlike prior research on overconfidence, we examine the effect of managerial optimistic expectation on corporate investment. Using BERT to analyze Management Discussion and Analysis sections of Chinese A-share firms’ annual reports, we construct firm-level expectation measures. Analyzing 29,664 firm-year observations (2007–2023), we find optimistic expectations significantly reduce investment efficiency through overinvestment rather than underinvestment. Mechanism analysis reveals that over-optimism drives aggressive strategies, causing suboptimal resource allocation. Long-term institutional ownership and abundant cash flow amplify this effect. The impact intensifies when chairmen possess financial backgrounds, higher education, or during economic expansions. Our findings advance understanding of cognitive biases in investment decisions and inform corporate governance optimization.

Suggested Citation

  • Xing, Licong & Qiu, Guchuan & Chen, Xuezhen & Zhang, Yaoyi, 2025. "When optimism hurts: Managerial expectations and investment inefficiency," Finance Research Letters, Elsevier, vol. 86(PC).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pc:s1544612325016800
    DOI: 10.1016/j.frl.2025.108426
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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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