Year: 2019
Type: article
Abstract: Managerial optimism theory is behavioral finance's greatest achievement. It explains two prominent features of corporate financial behavior – over‐investment and pecking‐order capital structure preferences – that otherwise require two different theories with mutually incompatible assumptions about managerial loyalties to shareholder‐value maximization. After reviewing the development of managerial optimism as a unifying theory, I use a simple change of measure to transform risk‐averse optimism to risk‐neutral probabilities that can be pessimistic or optimistic depending on wealth changes. This unexplored feature has implications for, among other things, pay for performance when managers are excessively optimistic.
Source: European Financial Management
DOI: 10.1111/eufm.12218
Author: J. B. Heaton
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $2,800
OpenAlex ID: W2941291138