Managerial Optimism and the Impact of Cash Flow Sensitivity on Corporate Investment: The Case of Greece

Purpose - The existence of optimism as a personal psychological characteristic of managers is a necessity in contemporary economy and decision making, although the phenomenon of over-optimism may lead to unfavourable outcomes. The purpose of this study is to examine the optimism bias and its impact on the firms' future performance. Especially regarding the recent years where Greece faces increased economic depression, high percentages of unemployment and lack of budgetary discipline, the goal is therefore, to find whether managerial optimism has an impact on corporate investment of Greek firms. Design/methodology/approach - The investment of firms with optimistic managers is more sensitive to cash flow than the investment of firms with managers who are not optimistic. To test the research question a number of fixed effect panel regressions of capital expenditures (capital expenditures divided by lagged assets is the dependent variable) is run. In all regressions we analyse cash flow divided by lagged assets and lagged Tobin's Q as the independent variables, for firms whose managers are classified as optimistic and not optimistic. This classification is based on the optimism "dummy" variable, which is equal to 1 when members of the Executive Board and the Supervisory Board (ALL), only the Executive Board (EB), and only CEO are classified as optimistic. The concept of this study is tested for firms which are listed in the Athens Stock Exchange. A total of 243 firms are recorded, for the time period between 2007 and 2012, including firms from 11 different industries; basic materials, chemicals, consumer goods, consumer services, health care, industrials, financials, oil and gas, technology, telecommunications and utilities. Based on the literature and on related methodology aspects, financial firms are excluded. Findings - It was revealed that managerial optimism affects corporate investment in firms with high degree of closely held shares. Moreover, managerial optimism is never linked to corporate investment regarding firms which belong to middle degree of closely held shares. Additionally it is proved that decisions for acquisitions are not affected by the manager's optimism regarding the prospects of his / her firm. This result it is not consistent with results of previous literature like Malmendier and Tate (2008) and Glaser et al. (2008) who have found that cash flow, Tobin's Q and firm size mainly drive the probability of an acquisition. Finally, it is confirmed that investment of firms with optimistic managers was found to be more sensitive to cash flow than the investment of firms with managers who are not optimistic. Optimism was proved to be extremely effective concerning investment. Research limitations/implications - A possible proposal for further research could be the testing of each year separately. In this study we have run the regressions for the whole of the 6-year period of 2007 to 2012. However, testing each year individually could provide researchers with the ability to compare different results, to find out whether there was anything special statistically for each specific year and maybe test the period after the year 2010 when the Greek crisis had started to come up on the horizon. The impact of the Greek financial crisis on managerial behaviour and on the personal characteristics of managers like optimism could constitute a field for further research. Originality/value - Since research on this specific field of finance is quite limited; this study aims to add value on the existing knowledge on the Greek case. The investigation of managerial optimism as a personal, psychological and mental characteristic encloses the effort of Greek managers to come out of the economic crisis and consequently achieve greater outcomes for their firms.