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CEO optimism and forced turnover

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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