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Managerial optimism: New observations on the unifying theory
Author(s) -
Heaton J. B.
Publication year - 2019
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12218
Subject(s) - optimism , pessimism , economics , pecking order , maximization , investment (military) , microeconomics , corporate finance , value (mathematics) , positive economics , financial economics , psychology , social psychology , finance , computer science , philosophy , epistemology , evolutionary biology , machine learning , politics , political science , law , biology
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.