Financially Constrained Firms: The Impact of Managerial Optimism and Corporate Investment on Inefficiencies Leading to Low Market Valuation - The Case of Greece

Financial constraints in capital markets can underline the macroeconomic effect of fluctuations in investment to cash flow and liquidity which has as a result several firms to reduce their access to low-cost finance. The examination of this aspect in detail determines the magnitude of the effects of internal finance on investment. Diversification as an underlying factor of financial constraints can create several costs. Diversified firms have the tendency to overinvest in lines of business which display poor investment opportunities. Diversification indeed reduces value. This loss in value is found mainly for firms of all sizes having managers with a higher level of optimism. The link between optimism and corporate investment is more pronounced in financially constrained firms. When the wedge between the internal and external cost of funds increases, a firm is considered to be more financially constrained. Managers are undisputedly optimistic and firms with optimistic managers tend to invest more. The investment of firms with optimistic managers is more sensitive to cash flow especially for financially constrained firms. Analysing a sample of listed companies in Greece, it is found that the higher the managerial optimism, the lower the excess value of a firm. Optimism and financial constraint measures are based on the insider stock transaction behaviour of all senior managers they have to report to the Hellenic Capital Market Commission. These findings show that the investigation of decision-making processes in Greece is crucial.