Received: 29 November 2018 

|  Revised: 11 October 2019 

|
  Accepted: 12 October 2019

DOI: 10.1002/rfe.1092

ORIGINAL ARTICLE

Top management team optimism and its influence on firms'

financing and investment decisions

Tobias Heizer1  | Laura R. Rettig2

1
Munich School of Management, Institute
for Capital Markets and Corporate Finance,
Abstract
Ludwig-Maximilians-Universität München, This paper examines the influence of optimism among the top management team mem-
München, Germany bers on corporate investment and financing decisions. We develop an optimism measure
2
School of Business and Economics,
based on voluntary insider transactions that is applicable to all officers and directors of a
Finance Center Muenster, University of
Muenster, Münster, Germany firm. Our results suggest that corporate policies are not solely influenced by an individual
CEO's optimism, but rather driven by the attitudes of top management team members as
Correspondence
a group. In fact, we find that the impact of CEO optimism on corporate investment and
Laura R. Rettig, School of Business and
Economics, Finance Center Muenster, financing decisions depends on the optimism of other officers and/or directors. In con-
University of Muenster, Münster, Germany. trast, if several other officers and/or directors, apart from the CEO, are optimistic, their
Email: laurarettig@gmx.net
influence is significant, independent of CEO optimism. Our analyses include all public
US companies within the Compustat universe for a time span of 20 years.

KEYWORDS
behavioral corporate finance, corporate capital structure, corporate investment, optimism, top
management teams

JEL CLASSIFICATION
G31; G32; G34; G14; G02

1  |   IN T RO D U C T ION
Theory and evidence on the determinants of corporate financing and investment decisions are extensive and diverse. Apart
from firm-, industry-, and time-specific factors, research also discusses the role of managers. For instance, Bertrand and Schoar
(2003) identify general manager-specific effects in firm behavior. The idea is most intuitive for CEOs because they are the most
prominent and visible decision-makers within a firm. Accordingly, existing research focuses on the influence of CEO charac-
teristics on firm policies. However, CFOs and CIOs should also be expected to have an influence on cash, dividend, and capital
structure policies. Findings of studies which investigate the influence of managers in specific corporate positions on different
aspects of firm behavior do not fit into one big picture. For example, Bertrand and Schoar (2003) track managers across firms
over time and find that CFOs (and all “other”, unspecified officers) have more impact on financial decisions than CEOs. In
contrast, 36%–47% of CEOs consider themselves to be the dominant decision-maker for financial and investment decisions
compared to only 10%–24% of CFOs (Graham, Harvey, & Puri, 2015).
This paper casts doubt on the assumption that an individual manager alone, such as the CEO, is decisive for a firm's action.
We investigate the influence of managers’ optimism, which is defined as a generalized positive expectation about future events.1 
Evidence shows that CEOs suffer from optimism and overconfidence and are more biased than the lay population (Graham,
Harvey, & Puri, 2013). Most studies in the literature focus on the CEO because they assume that CEOs are the dominant deci-
sion-makers. However, what happens if decisions are actually made within teams? Our results indicate that corporate financial
policies are driven by a collective attitude of the top management team (TMT). We find that if two or more members of the

Rev Financ Econ. 2020;00:1–22. wileyonlinelibrary.com/journal/rfe © 2020 University of New Orleans     1 |

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2       HEIZER and RETTIG

TMT (other than the CEO) are optimistic, net debt issuance, investment cash-flow sensitivity and M&A activity increase.
Further, net equity issuance decreases. In many cases, the effect of TMT optimism trumps the effect of CEO optimism, but not
vice versa. This implies that corporate decisions are team decisions (Tulimieri & Banai, 2010). Thus, our results support ideas
in the strategic leadership literature that see top level managers as a team and interpret organizational outcomes as “reflections
of the values and cognitive bases of powerful actors in the organization” (Hambrick & Mason, 1984, p. 193).2  At the same time,
we cast doubt on the common perspective that the CEO is the most important and dominant decision-maker in a firm.
Our analyses require an optimism measure which is available for all TMT members. To the best of our knowledge, we are the first
to consider a management group optimism measure which takes into account the number of different managers who are identified as
optimistic within one firm. We assume that a person’s general tendency to be optimistic is inherent in character, but that the extent to
which optimism is expressed varies over time. Therefore, we implement a time-variant optimism measure (Sen & Tumarkin, 2015).
Our measure is based on managers’ voluntary net equity purchases of shares in their company and is therefore a time-variant modifi-
cation of the net buyer measure by Malmendier and Tate (2005). In contrast to existing optimism proxies based on option execution
behavior, our measure does neither require extensive and costly hand collection of data nor does it lead to a major restriction in
sample size.3  We implement this measure for all public U.S. companies within the Compustat universe for a time span of 20 years.
Similar measures based on Execucomp data are only available for significantly smaller firm and manager samples.
The remainder of this paper is organized as follows. Section 2 gives a literature review. In Section 3, we deduce our main
hypotheses. Section 4 provides details on the data and the sample construction. Section 5 presents our methodology including
the construction of our optimism measures. Section 6 presents descriptive analyses and Section 7 shows results from multivar-
iate regressions. Section 8 concludes.

2  |  LIT E R AT U R E R E V IE W

2.1  |  The influence of managers on firm decisions

We will first discuss research on managerial influence on corporate decisions in general. Based on Bertrand and Schoar (2003),
who find that fixed effects of single top managers are important with respect to financial, investment, and organizational
strategies, many empirical studies analyze the influence of the CEO on firm policies in further detail. Cronqvist, Makhija, and
Yonker (2012) detect a positive connection between CEOs’ personal leverage and their firms’ leverage. Further, findings of
Graham et al. (2013), Yim (2013), Jenter and Lewellen (2015), and Cust´odio and Metzger (2013) suggest that CEOs’ risk
tolerance, age, career concerns, and experience influence the frequency and outcomes of mergers and acquisitions.4  However,
the existence of a significant CEO effect on firm behavior is controversial. Fee, Hadlock, and Pierce (2013) cannot identify any
changes in firm policies after exogenous CEO departures. Frank and Goyal (2007) also fail to find a strong influence of CEO
traits on corporate leverage and suggest that CEOs serve, at the utmost, as a proxy for the entire management team.
Research on the influence of TMT members apart from CEOs is less extensive. Bertrand and Schoar (2003) show that fixed
effects of the top five highest paid executives matter for several corporate policies. Further, Frank and Goyal (2007) detect an
influence of CFOs on corporate leverage which is at least as large as the one of CEOs. Empirical findings also suggest that traits
of directors influence firm decisions. The role of boards has changed over time from pure monitoring to a more active role that
includes the power to dismiss the top management.5 
Therefore, the board of directors may also influence top management decisions. Accordingly, Güner, Malmendier and Tate
(2008) detect that commercial bankers joining boards raise external funding and diminish investment-cash flow sensitivities, whereas
investment bankers on boards lead to larger bond issues and less successful acquisitions. Moreover, Kolasinski and Li (2013) provide
evidence that strong and independent boards prevent overconfident CEOs from making bad acquisitions. Yet, strategic leadership lit-
erature calls for more research on the influence of executives beyond the CEO level (e.g., Finkelstein, Hambrick, & Cannella, 2009).
Only scarce empirical research goes even one step further and distinguishes between managerial positions and correspond-
ing responsibilities. Based on broad surveys, Graham et al. (2015) report that CEOs themselves claim to be the dominant
decision-makers in M&A decisions, whereas other investment decisions are a bit more likely to be delegated. CFOs state to be
dominant decision-makers for mostly capital structure decisions. Differentiating between CEOs, CFOs, and other executives,
Bertrand and Schoar (2003) find that CFO traits matter more for financial decisions. Accordingly, Six, Normann, Stock, and
Schiereck (2013) find that CEOs rather influence firm performance and transactional policies compared to CFOs who shape
funding policies. Further, Malmendier, Tate, and Yan (2011) refer to anecdotal evidence that CFOs may design financing de-
cisions, but the CEO alone still needs to approve the respective sanctions and may overrule the CFO. Similarly, Cust´odio and
Metzger (2013) provide evidence that CEOs influence financial policies by changing the CFO.
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2.2  |  Optimism among managers

Optimism is one of the most analyzed characteristics when it comes to manager-specific effects on corporate decisions.
Empirical research focuses on individual prominent managers (mostly CEOs, scarcely CFOs) and their optimism's influence
on a wide range of corporate decisions. Regarding financing decisions, Hackbarth (2008) develops a theoretical framework
which explains that optimistic managers choose higher debt levels, issue new debt more often, and follow a pecking order.
Accordingly, Malmendier et al. (2011) show that optimistic CEOs use less external finance and, conditional on accessing ex-
ternal capital, issue less equity than their peers (Lin, Hu, & Chen, 2008; Sen & Tumarkin, 2015). Further, Graham et al. (2013)
report that optimistic CEOs have higher debt ratios and use more short-term debt. Malmendier and Zheng (2012) differentiate
between CEOs and CFOs and find that capital structure variables are primarily affected by CFO optimism.
Theory also deduces an optimism effect on investment behavior. Optimism is assumed to lead to overinvestment if internal
funds are available and to underinvestment otherwise, resulting in a higher investment-cash flow sensitivity of financially
constrained firms (Heaton, 2002). Empirical findings confirm these conclusions for optimism of CEOs (Glaser, Schäfers, &
Weber, 2008; Huang, Jiang, Liu, & Zhang, 2011; Malmendier & Tate, 2005; Sen & Tumarkin, 2015), and CFOs (Ben-David,
Graham & Harvey, 2014). Finally, Roll’s (1986) hubris hypothesis suggests that optimistic managers are more likely to engage
in acquisitions. Empirical evidence supports this conjecture (Brown & Sarma, 2007; Ferris, Jayaraman, & Sabherwal, 2013;
Kolasinski & Li, 2013; Malmendier & Tate, 2008).6  Glaser, Schäfers and Weber (2008) document an impact of non-CEO man-
agers’ optimism on a range of financial corporate decisions.

2.3  |  Optimism measures

Apart from psychometric tests, which are usually not available for larger samples of managers (an exception is Graham et al.,
2013), the most direct way to capture managerial optimism is via more general surveys. However, panel datasets based on sur-
veys among managers are scarce, too (e.g., Ben-David, Graham, & Harvey, 2013; Inoue, Kato, & Yamasaki, 2012). Thus, it is
convenient to measure managerial optimism indirectly based on private portfolio decisions of managers. Managers have their
wealth concentrated in their firm and should dispose of any additional exposure to firm risk, that is, exercise in-the-money op-
tions as soon as possible and not buy additional shares in their company due to diversification needs. Accordingly, Malmendier
and Tate (2005, 2008) and Malmendier et al. (2011) were the first to develop several optimism measures based on managers’
option exercise behavior. They identify those CEOs as optimistic who fail to exercise vested, highly in-the-money options and
refine their measure by classifying only those CEOs as biased who earn negative abnormal returns from their delayed exercise
behavior. Even though Malmendier and Tate (2008) implement further measures which identify a CEO as optimistic begin-
ning at the point in time when she shows the relevant behavior, their measures are in principle time-invariant. For example,
Malmendier and Tate (2005) also identify CEOs as optimistic if they buy stock of their firm on net in more years than they sell
on net during the first five sample years. Countless studies apply those proxies and similar option-based measures to different
samples to investigate the influence of managerial optimism on several firm decisions.7 
The idea behind our optimism measure builds on other papers that measure optimism via voluntary stock holdings and pur-
chases of managers. For example, Doukas and Petmezas (2007) interpret positive net purchase ratios of managers in their firm's
stock as a sign of optimism. Similarly, Billett and Qian (2008) suggest that insider trading activity implies CEO optimism.
Moreover, Glaser, Schäfers and Weber (2008) implement an optimism measure for German managers and identify those man-
agers as optimistic who net purchase stock of their company. Kolasinski and Li (2013) develop a CEO optimism measure which
identifies a CEO as optimistic if he/she voluntarily purchases her company's stock and earns ex post a negative abnormal return.
These optimism measures are closely related to the one in this paper. However, to our knowledge, we are the first to apply a
time-variant measure to the entire TMT and take into account the number of different managers who are net buyers (optimistic).

3  |  H Y P OTHE S E S D E V E LOP MENT

We investigate the influence of TMT optimism on financing and investment decisions. We focus on firm policies for which the
expected influence of optimism is well founded in theory and confirmed by empirical results. Thus, our hypotheses are based
on existing theoretical and empirical research. In contrast to existing literature that focuses on the effects of optimism of indi-
vidual managers, we consider the entire TMT. In order to investigate if the CEO is the main decision maker, we differentiate
between CEO optimism and optimism among the remaining TMT as well as members of the board of directors.
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4       HEIZER and RETTIG

Our first hypothesis concerns corporate financing behavior. The models of Heaton (2002) and Hackbarth (2008) show that
optimistic managers overestimate the returns to their investment projects. Consequently, they believe that an efficient capital
market undervalues their firm's risky securities, which makes them prefer internal funds. Hackbarth (2008) assumes further
that equity prices are more sensitive to biases in beliefs since differences in opinions between outside investors and the manager
about future cash flows matter for all states of the world in the case of equity financing. In contrast, in the case of risky debt,
differences in opinions matter only for default states. Consequently, optimistic managers perceive the costs of issuing equity to
be larger than those of issuing debt. Malmendier et al. (2011),
Malmendier, and Zheng and Sen and Tumarkin (2015) confirm these assumptions empirically. In accordance with previous
literature, we test the following hypothesis:

Hypothesis 1  Conditional on raising external capital, i.e., given a financial deficit, optimism among the TMT (and board of
directors) leads to a preference for debt financing compared to equity financing.

The preference for internal funds and the overestimation of future returns to investment projects of optimistic managers
affect corporate investment patterns, too. Based on Heaton’s (2002) model, Malmendier and Tate (2005) show that optimistic
managers are more likely to (over-)invest when internal funds are sufficient. At the same time, they are reluctant to raise exter-
nal capital in order to finance new investment projects when internal funds are not sufficient. Hence, managerial optimism leads
to an increase in the sensitivity of investment levels to cash flows, as formulated in the following hypothesis:

Hypothesis 2  Optimism among the TMT (and board of directors) leads to an increase in investment-cash flow sensitivity.

Managerial optimism affects the level and the nature of investment. Thus, optimism is assumed to influence a firm’s M&A
activity. Roll (1986) suggests that a manager’s excessive optimism about the ability to create value is a major driver of mergers
and acquisitions. Accordingly, Malmendier and Tate (2008) argue that optimistic managers do not only overestimate the returns
which they can generate in their own firm but also the ones which they can earn by taking over other firms. This overestimation
of merger synergies leads to an excessive willingness to acquire other firms, at least if there is no need of accessing external
capital markets to finance the deals (e.g., Graham et al., 2013; Sen & Tumarkin, 2015). Further, Doukas and Petmezas (2007)
and Billett and Qian (2008) state that optimistic managers who perceive to have superior skills are more motivated to engage in
complicated tasks such as multiple acquisitions. These considerations lead to our third hypothesis:

Hypothesis 3  Optimism among the TMT (and board of directors) leads to an increase in M&A activity.

4  |  DATA
We obtain data on insider transactions, i.e., trades of managers with securities of their own firm, from Thomson Reuters Insider
Filings, which compiles information reported by insiders to the SEC on forms 3, 4, and 5. Since 1934, the Securities and
Exchange Act requires all individuals that have access to non-public, material insider information to report to the SEC when
they trade in their company's stock. These individuals include a company's officers, directors, and beneficial owners of more
than 10% of company stock. Among other things, the data contain the name and positions of the insider, company and security
identifiers, the date of the transaction, the number of traded shares, and the trading price.
Thomson Reuters Insider Filings data start from January 1st 1986. We consider only open market or private purchases or
sales of non-derivative securities, as well as small acquisitions under Rule 16a-6. Further, we drop filings from form 3 (i.e.,
initial statements of beneficial ownership) and form 5 (i.e., changes in beneficial ownership apart from small acquisitions
under Rule 16a-6), transactions with missing form type, and sales which are totally or partly related to the exercise of options.
Moreover, we eliminate trades with zero or missing stock price or number of traded stock as well as amendments to other
records. The data contain information on the position of the trading insider where each insider can have up to four different
positions within one company. We delete transactions by individuals who are exclusively affiliates, beneficial owners and/or
other non-relevant persons without decision power as well as deceased persons. Further, we aggregate transactions of the same
insider from the same company on the same day and calculate the effective number and volume of traded shares. For trades
which are reported to be made on non-trading days we use the next trading day.
Insider trading data are matched with daily market data from CRSP via the security-specific eight-digit CUSIP to obtain the
number of outstanding shares. We exclude insider transactions with securities for which the CUSIP is missing and transactions
HEIZER and RETTIG   
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with CUSIPs that could not be matched with CRSP. Further, we match the insider trading data with yearly company data from
Compustat. Our initial sample consists of the entire U.S. Compustat universe from 1986 to 2015 including public and private,
as well as active and inactive firms with a valid Compustat ID. Insider trading data are matched with Compustat data both via
the company-specific six-digit CUSIP and the company name. We exclude insider transactions which cannot be matched with
Compustat. We are interested in a firm sample which contains all companies whose insiders are obliged to report their trans-
actions to the SEC. Therefore, we exclude fiscal years for which market capitalization is missing and for firms which do not
report insider transactions.
We delete firm years with missing or zero total assets as well as the transactions which took place during these firm
years. Additionally, we eliminate transactions and firm years concerning financial, insurance, and real estate firms (SIC-Code
6000–6799) and regulated utilities (SIC-Code 4900–4999). Further, we delete firm years with negative common equity and
the respective insider transactions. Finally, we exclude transactions for which the number of traded shares is greater than 20%
of the number of shares outstanding. The availability of insider trading data significantly increases in 1996, so we restrict our
sample to the period from 1996 till 2015. Thus, we eliminate fiscal years that end earlier than December 31st 1996 and delete
the corresponding insider transactions. Further, we exclude transactions which occur after the latest available balance sheet date
of the respective company. In total, our sample contains 103,762 firm years of 14,396 distinct firms over 20 years with 539,021
relevant insider transactions.
Note that the number of insider transactions is only sufficiently large for a few unique executive positions or if several
sub-positions are aggregated. We construct our yearly optimism measures by aggregating insider transactions on a yearly basis.
Thus, in order to have a sufficiently large number of underlying transactions, we restrict our analysis to CEOs, officers, and
directors. This procedure is also reasonable since these categories can be generalized and exist among the majority of firms.

5  |   M ET H OD O LO GY
5.1  |  Measuring optimism

Based on our final sample of voluntary transactions of insiders with stock of their company, we initially construct an optimism
indicator on an insider and a fiscal year level. For each individual insider we calculate the net number of shares which are
bought or sold during each fiscal year by aggregating all transactions with stock of the respective company during this fiscal
year. In order to measure optimism of managers in particular corporate positions, we subsequently implement yearly dummy
variables for each firm. Our dummy variables equal one if the net number of respective firm shares one or more insiders traded
over the fiscal year is positive, and zero otherwise.8 
If no insider transactions with a firm's stock occur during a fiscal year, we assume that there are no optimistic insiders for
this firm in this year. This procedure provides us with a large non-optimistic control group, and consequently leads to a restric-
tive optimism categorization. We do not rely on a panel of only top 500 or 1,500 firms such as most other analyses which use
insider portfolio information from Execucomp. In contrast, the number of distinct firms per year ranges from 2,931 to 6,667 in
our sample.
The idea behind our optimism measures is that insiders time their decisions so that private portfolio transactions reflect
managerial expectations. Surveys in which managers explicitly claim to time the market in their corporate decision underpin
the validity of this assumption (Graham & Harvey, 2001). Jenter (2008) provides evidence that managers trade with their firms’
stock around corporate events, which indicates market timing. Further, managers, in general, are highly underdiversified with
respect to their firm. One explanation why they still increase their private share holdings further is that they are optimistic with
respect to their firm's future development and think that the market undervalues its prospects.
Our optimism proxies are similar to existing measures which are also based on additional stock purchases of managers. For
instance, Malmendier and Tate (2005) categorize CEOs as optimistic if they are net buyers of their firm's stock in more years than
they are net sellers during their first five sample years (see also Andreou, Doukas, & Louca, 2011). Further, Glaser et al. (2008)
develop a time variant optimism measure for German managers and identify those managers as optimistic who net purchase
stock of their firm over the respective year. On the level of individual managers, their measure corresponds to ours. Moreover,
Kolasinski and Li (2013) identify a CEO as being overconfident in a given year, if, within the next two calendar years, she vol-
untarily purchases her own firm's stock and earns a negative abnormal return over the next 180 days with these purchased stock.
We deliberately opt for yearly and thus time-variant optimism measures, because the degree of managers’ optimism can
vary over time like a mood. A time-variant measure captures this possibility.9  Further, a time-variant measure allows us to in-
clude optimism and firm-fixed effects into our regression models, which would not be possible if optimism was time-invariant
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6       HEIZER and RETTIG

and manager turnover low. However, we are able to control for optimism and for unobservable firm characteristics. Further, if
managerial attitudes can change over time, endogeneity concerns with respect to selection diminish regarding managerial and
firm characteristics.
With respect to attributes of individual managers, we focus on the influence of CEO optimism on firm decisions. Thus, we
implement a yearly dummy variable Optim_CEO, which equals one if the net number of traded shares of a firm's CEO in the
respective fiscal year is greater than zero, and zero otherwise.10  We include all other officers (and directors) into our measures
of TMT (and director) optimism described below. It stands to reason that the CFO has superior decision authority for financial
and investment decisions over other officers. However, the ambiguity of results from previous studies gives the impression
that the influence of CFO attributes is limited. Graham et al. (2015) find that 46.5% (36.3%) of CEOs see themselves as the
dominant decision-makers for M&A (investment) decisions compared to only 9.5% (13.8%) of CFOs. CFOs seem to be more
dominant in capital structure decisions: 23.9% of CFOs state to be the dominant decision-makers compared to 39.5% of CEOs.
Contrarily, Ben-David et al. (2013) identify a significant relation between CFO long-term optimism and investment intensity,
but not firm leverage. Thus, we aim to turn the focus away from the influence of individual managers and toward the role of all
other non-CEO officers. For this purpose, we implement a dummy variable Optim_O, which equals one if two or more distinct
officers who are not the firm's CEO are optimistic according to our individual optimism indicator, that is, are net buyers in their
firm's stock, for a given fiscal year.
We choose to set the limit at two or more distinct officers apart from the CEO to assess the influence of TMT optimism for
several reasons. Obviously, it would not be enough if one single officer who is not the CEO is optimistic in order to refer to
group optimism among the TMT. Further, it is not quite frequent that two or more officers of a firm who are not the CEO are
net buyers in a given year. The proportion is only 6.46% of all firm years. The proportion of firm years with three optimistic
officers is only 1.48%. Hence, categorizing the TMT as optimistic if two or more officers are identified as optimistic already
is a fairly restrictive categorization scheme. Unfortunately, we do not have information on firm-specific TMT size. Thus, we
cannot assess which portion of the TMT is represented by two non-CEO officers. However, Guadalupe, Li, and Wulf (2014)
report that the size of the executive team grew from 5 to 10 persons for large U.S. firms from the mid-1980s to the mid-2000s.
Given that our sample also comprises smaller firms, we can assume that the average number of officers is smaller for our
sample. Hence, two or more net-buying officers represent a considerable fraction of officers who send an optimistic signal to
the other managers. Even if the remaining TMT members are initially not optimistic, they may be affected by their colleagues’
optimism (Barsade, Ward, Turner, & Sonnenfeld, 2000). This effect is enforced by insider trades being an observable sign for
other TMT members, so that we do not rely on the assumption that TMT members explicitly share their moods among each
other. For instance, Bartel and Saavedra (2000) find that work group members experience group moods when they can detect
and display mood information through observable behavioral expressions.
In addition to Optim_O, which considers all of a firm's officers except the CEO, we calculate a TMT optimism measure
which additionally includes all of a firm's directors. Accordingly, Optim_OD is a dummy variable, which equals one if two or
more of a firm's officers or directors apart from the CEO are net buyers in their firm's stock for a given fiscal year.
Only few previous studies implement optimism measures for the entire management team. Glaser et al. (2008) implement
their net buyer optimism measure for Germany for the executive and the supervisory board as a group. However, they do not
exclude the CEO from their executive board measures. Moreover, they do not consider the number of distinct optimistic exec-
utives but identify the group as optimistic as soon as one member is categorized as optimistic. Further, Andreou et al. (2011)
calculate a management team optimism measure based on net buying and option holding behavior. Yet, they are restricted to the
Execucomp universe with the five highest paid managers and additionally need to exclude firm years with missing information
for more than half of the members of the management team. Moreover, they seem to include the CEO in the management group
measure and miss to run regressions which account for both CEO and management team optimism separately.

5.2  |  Financing decisions

To test hypothesis H1, that is, optimism among the TMT leads to a preference for debt financing compared to equity financ-
ing, we use a financing deficit framework (Frank & Goyal, 2003; Malmendier et al., 2011; Malmendier & Zheng, 2012; Sen &
Tumarkin, 2015; Shyam-Sunder & Myers, 1999). The financing deficit represents the amount managers have to raise through
debt or equity issues in a given firm year to cover expenditures. On the one hand, we test whether optimistic managers cover
more of their firm's financing by using debt than non-optimistic managers. On the other, we investigate whether optimistic
managers cover less of their financing deficit with equity.
HEIZER and RETTIG   
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The financing deficit approach is superior to testing for more debt issues (conditional on issuing any public security) since
it focuses on the amount of sources raised rather than the frequency with which it is raised.11  Optimistic managers might raise
more funds than rational managers since they overestimate their investment opportunities. Alternatively, they might raise less
funds because they perceive external financing as too costly. Therefore, rather than test whether optimistic managers raise more
debt or fewer equity than their peers, we investigate whether the mix of external financing sources depends on optimism. This
way, our findings are also unaffected by competing trade-off vs. pecking-order theories (Malmendier et al., 2011). Moreover,
we can use the full sample in our regressions and are not restricted to firm years in which there is an issue of public securities.
The choice and construction of variables are adopted from Malmendier et al. (2011) and Malmendier and Zheng (2012). We
use the following regression specification to test hypothesis H1:

� � �
Debti,t = 𝛽1 + FDi,t 𝛽2 + Xi,t 𝛽3 + (FDi,t × Xi,t )𝛽4 + OPTIMi,t 𝛽5
�
(1)
+ (FDi,t × OPTIMi,t )𝛽6 + 𝜀i,t ,

� � �
Equityi,t = 𝛽1 + FDi,t 𝛽2 + Xi,t 𝛽3 + (FDi,t × Xi,t )𝛽4 + OPTIMi,t 𝛽5
�
(2)
+ (FDi,t × OPTIMi,t )𝛽6 + 𝜀i,t ,

where Debti,t represents net debt issues of firm i in year t defined as long-term debt issuance minus long-term debt reduction and
Equityi,t represents net equity issuance calculated as the difference between stock repurchases and sales of common stock. FDi,t
denotes the financing deficit. All three variables are divided by total assets at the end of the previous fiscal year. The vector Xi,t
includes firm-level controls, namely beginning of fiscal year book leverage, divided by lagged total assets, and changes in prof-
itability, tangibility, the natural logarithm of sales, and Tobin’s Q. We further include interaction terms between all firm controls
and the financial deficit. To account for managerial optimism, we include our three optimism measures (included in the vector
OPTIMi,t) for CEO optimism Optim_CEOi,t, TMT optimism (except the CEO) Optim_Oi,t, and optimism among all officers and
directors (except the CEO) Optim_ODi,t, as well as interactions of those measures with FDi,t. In order to separate the effect of
CEO optimism from TMT and officer optimism, we also interact Optim_CEOi,t(and FDi,t) with Optim_Oi,t and Optim_ODi,t, re-
spectively. Further, all regressions include firm-fixed effects in order to separate manager effects from time-invariant firm effects,
as well as year-fixed effects. Throughout the analyses, we cluster standard errors at the firm level to account for autocorrelation
and heteroscedasticity in the error term 𝜀i,t (Petersen, 2009). Based on hypothesis H1, we expect the estimated coefficients in-
cluded in β6 to be significantly positive for the specification in equation (1), and significantly negative for the specification in
equation (2).

5.3  |  Investment behavior

According to hypothesis H2, TMT optimism leads to an increase in investment-cash flow sensitivities. We test this hypothesis
is based on Malmendier and Tate (2005), Glaser et al. (2008) and Ben-David et al. (2013). Our regression specification is:

�
Ii,t = 𝛽1 + CFi,t 𝛽2 + Xi,t �
𝛽3 + OPTIMi,t �
𝛽4 + (CFi,t × OPTIMi,t )𝛽5 + 𝜀i,t , (3)

where Ii,t is the difference between investment intensity (net investments, divided by total assets at the end of the previous fiscal
year) of firm i in year t and the mean of investment intensity of all firms in the industry (i.e. with the same two-digit SIC industry
classification as firm i). C Fi,t denotes a firm’s cash flows (income before extraordinary items + depreciation and amortization),
divided by total assets at the end of the previous fiscal year. The vector Xi,t includes firm-level controls, namely beginning of fiscal
year book leverage and Q, both divided by lagged total assets, beginning of fiscal year tangibility, and natural logarithm of sales. To
investigate the impact of managerial optimism, we again include our optimism measures (included in the vector OPTIMi,t) as well as
interactions between those measures with C Fi,t. In order to separate the effect of CEO optimism from TMT and officer optimism,
we interact Optim_CEOi,t (and CFi,t) with Optim_Oi,t and Optim_ODi,t, respectively. We include firm- and year-fixed effects and
cluster standard errors at the firm level. If managerial optimism increases the sensitivity of investment levels to cash flows, we expect
the estimated coefficients included in β5 to be significantly positive.
Hypothesis H3 states that TMT optimism leads to an increase in M&A activity. We test this prediction by applying a logit
regression specification which is similarly used by Malmendier and Tate (2008) and Glaser, Schäfers and Weber (2008):
 |
8       HEIZER and RETTIG

�
M&Ai,t = 𝛽1 + Xi,t �
𝛽2 + OPTIMi,t 𝛽3 + 𝜀i,t . (4)

Following Huang, Siew, and Zhang (2014), Adhikari and Agrawal (2016), and Kubick, Lynch, Mayberry, and Omer (2016), the
dependent variable M&Ai,t is a dummy variable, which is set to one, if net assets from acquisitions for firm i in year t are greater
than zero. Thus, the dummy variable takes the value zero if net assets from acquisitions are zero or missing. The vector Xi,t includes
firm-level controls, namely cash flow, beginning of fiscal year book leverage and Q, all divided by lagged total assets, beginning
of fiscal year tangibility and natural logarithm of sales. They further comprise a control for industry- and year-specific M&A
activity (Kolasinski & Li, 2013). To account for managerial optimism, we include our three optimism measures (included in the
vector OPTIMi,t) as well as interactions between these measures. Further, all logit regressions contain firm- and year-fixed effects.
According to hypothesis H3, we expect the estimated coefficients included in β3 to be significantly positive.

6  |  D ES C RIP T IV E A NA LYS IS

6.1  |  Managerial optimism

Table 1 displays joint distributions of the three optimism dummies Optim_CEO, Optim_O, and Optim_OD. Our measures are
fairly restrictive. Only 9.97% of firm years are categorized to have an optimistic CEO. Optimism among the residual TMT is
even scarcer. In only 6.46% of all firm years, we observe that two or more officers who are not the CEO are identified as opti-
mistic, i.e., that Optim_O equals one. By definition, optimism among officers and directors is more frequent. Thus, Optim_OD
equals one in 15.09% of all firm years. Table 1 also shows joint frequencies for the three optimism measures. It reveals that
CEO and TMT optimism are not highly correlated. Given that a firm’s CEO is identified as optimistic, two or more other offic-
ers are also identified as optimistic in only 39.00% of firm years. In turn, for all firm years with two or more optimistic officers,
the CEO is only categorized as optimistic in 39.19% of firm years. Further, of all firm years with optimistic CEOs, Optim_OD
takes a value of one in 43.98% of firm years. Vice versa, given that Optim_OD equals one, we identify the CEO as optimistic,
too, in only 33.62% of firm years. These patterns support the idea behind our optimism measures since they cast doubt on
alternative explanations for voluntary insider purchases, for example, signaling of managers of one firm through coordinated
insider purchases. In the case of coordinated signaling, we would expect the CEO to motivate other management members
to purchase stock, resulting in a higher correlation between CEO and TMT trading behavior. However, it is less likely that

T A B L E 1   Optimism – joint distributions

Optim_CEO

Optim_O 0 1 Total
0 72,749 5,516 78,265
1 5,475 3,528 9,003
Total 78,224 9,044 87,268

Optim_CEO

Optim_OD 0 1 Total
0 77,581 4,166 81,747
1 3,665 1,856 5,521
Total 81,246 6,022 87,268

Optim_O

Optim_OD 0 1 Total
0 66,134 7,894 74,028
1 7,042 6,198 13,240
Total 73,176 14,092 87,268
Note: This table shows individual and joint distributions of the optimism dummies for a firms CEO (Optim_CEO), for all officers except the CEO (Optim_O), and for
all officers and directors except the CEO (Optim_OD). For a detailed definition of the variables please refer to Table A1 in the Appendix.
HEIZER and RETTIG   
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|
coordinated signaling explains voluntary share purchases if the purchase behavior of CEOs and other management members
is only weakly correlated.
Table 2 shows how our optimism measures develop over time on a firm level. It displays joint distributions of our optimism
measures for one firm in year t and the following year t + 1. Given that a CEO is identified as optimistic, the CEO is also opti-
mistic in the next year in 39.01% of cases. For Optim_O, the ratio lies at 30.82%. The ratio for Optim_OD is 43.98%. A CEO is
unlikely to constantly increase the private holdings in the firm’s stock. The high number of cases in which firms are identified
to have an optimistic CEO in consecutive years suggests that managers start to be optimistic at some point in time and keep this
positive mood for a while.
Optimism on an aggregated level is depicted in Figure 1. It shows the ratio of firms whose managers are identified as opti-
mistic according to Optim_CEO, Optim_O, and Optim_OD, respectively, compared to all firms in the sample in a given year.
Whereas optimism between a firm's CEO and the other managers is not closely related on the firm level, the development of ag-
gregated Optim_C EO, Optim_O, and Optim_OD is fairly parallel over time and shows slightly anticyclical patterns compared
to the development of the S&P500. Thus, managerial optimism peaks in 1997/98, 2008, and 2011.12  This indicates that man-
agers buy additional shares in their firms when stock prices have fallen since they perceive their firms as wrongly underpriced.
We cannot differentiate on the firm level whether this perception is true, meaning that managers are reasonably optimistic, or
wrong, i.e., that managers are overly optimistic. However, this is no major issue since our hypotheses rely, if at all, only on the
assumption that there is a difference between the perception of managers and firm outsiders.

6.2  |  Sample characteristics

Compared to datasets which are used in related studies, e.g., Malmendier and Tate (2005) and Malmendier et al. (2011), our
firm sample is not restricted to the 500 largest U.S. firms or 1,500 Execucomp universe. Therefore, it provides us with consider-
ably more firm observations and includes on average smaller firms. Table 3 displays summary statistics of our central financial
variables separately for a sample of firm years which are categorized to have optimistic managers and a sample of firm years
with no optimistic managers. We divide the sample according to Optim_CEO, and Optim_O, and Optim_OD. There is no clear
pattern regarding firm size in terms of sales and managerial optimism across our three classification schemes. However, the
mean of our net debt issue variables (Debt as well as Debt dummy) is always significantly larger for the optimistic subsamples.
This indicates that optimism among managers leads to a preference for debt financing, which is in accordance with hypothesis
H1. Further, the difference in means is larger if the sample is divided according to Optim_O or Optim_OD than if it is split ac-
cording to Optim_CEO. We observe opposite patterns for our net equity issue variable Equity. For this variable, the means are
higher for the non-optimistic subsamples, which is also in line with hypothesis H1. However, the means of our equity issuance

T A B L E 2   Optimism-development over time

t+1 0 1
Optim_CEO
0 72,749 93.00% 5,516 60.99%
1 5,475 7.00% 3,528 39.01%
Total 78,224 100.00% 9,044 100.00%
Optim_O
0 77,581 95.49% 4,166 69.18%
1 3,665 4.51% 1,856 30.82%
Total 81,246 100.00% 6,022 100.00%
Optim_OD
0 66,134 90.38% 7,894 56.02%
1 7,042 9.62% 6,198 43.98%
Total 73,176 100.00% 14,092 100.00%
Note: This table shows joint distributions of the optimism dummies for a firm’s CEO (Optim_CEO), for all officers except the CEO (Optim_O), and for all officers
and directors except the CEO (Optim_OD) in year t and the following year t+1. It shows absolute numbers as well as relative frequencies with respect to all available
observations in t with an optimism value of zero, and 1, respectively. For a detailed definition of the variables, please refer to Table A1 in the Appendix.
 |
10       HEIZER and RETTIG

F I G U R E 1   Aggregated Optimism over Time. This figure shows the ratio of firms the managers of which are identified as optimistic
compared to all firms in the sample for this year. The figure further displays the development of the S&P500 index. For a detailed definition of the
variables please refer to Table A1 in the Appendix

dummy Equity dummy are slightly higher for the optimistic Optim_CEO sample. This is surprising but does not necessarily
contradict our hypothesis. Table 3 further shows that Leverage is, on average, higher for firm years with optimistic managers.
Average investment intensity is slightly smaller for firm years with optimistic CEOs. Our M&A dummy variable M &A shows
higher means for the optimistic samples.

7  |  R EG R E SS ION A NA LYS IS

7.1  |  Optimism and capital structure choices

To test hypothesis H1, we implement the regression frameworks from Equations (1) and (2). Results are presented in Table 4
(level of net issued debt) and Table 5 (level of net issued equity). The central variables are the interaction terms between the
optimism variables and the financial deficit F D. Throughout our analyses, we separately run regressions without considering
managerial optimism (column (1)), including only CEO optimism (Optim_CEO, column (2)), only optimism of officers ex-
cept the CEO (Optim_O, column (3)), and only optimism of officers and directors except the CEO (Optim_OD, column (6)).
Further, we run regressions controlling for Optim_CEO and Optim_O (column (4)) and the interaction between both (column
(5)) as well as both Optim_C EO and Optim_OD (column (6) and the interaction between both (column (7)).
In accordance with previous literature, we find that the interaction of financial deficit and CEO optimism affects the sensi-
tivity of net debt issuance significantly. Surprisingly, the effect is not significant anymore once we control for non-CEO TMT
(and director) optimism, that is, if at least two members of the TMT (Optim_O) or TMT and and board of directors (Optim_OD)
 HEIZER and RETTIG

T A B L E 3   Financial statement data—optimistic vs. non-optimistic firm years

Optim_CEO Optim_O Optim_OD

0 1 Difference 0 1 Difference 0 1 Difference

Variables N Mean N Mean p-value N Mean N Mean p-value N Mean N Mean p-value
Ln(Sales) 84.451 48,885 10.229 48,336 .0414 88.316 48,565 6.364 52,440 .0000 79.48 48,009 15.2 53,095 .0000
Debt 79.07 0.0231 8.902 0.0284 .0002 82.745 0.0228 5.227 0.0366 .0000 75.121 0.0220 12.851 0.0332 .0000
Debt_dummy 93.292 0.2790 10.47 0.3206 .0000 97.284 0.2785 6.478 0.3544 .0000 88.265 0.2724 15.497 0.3450 .0000
Equity 79.07 0.1100 8.902 0.0783 .0000 82.745 0.1096 5.227 0.0624 .0000 75.121 0.1134 12.851 0.0679 .0000
Equity_dummy 93.292 0.5971 10.47 0.6132 .0015 97.284 0.5980 6.478 0.6099 .0583 88.265 0.5990 15.497 0.5975 .7256
Leverage 93.091 0.4242 10.436 0.4805 .0000 97.071 0.4255 6.456 0.4958 .0000 88.075 0.4203 15.452 0.4842 .0000
Investment intensity 78.41 0.1137 8.85 0.1012 .0000 82.074 0.1122 5.186 0.1159 .1874 74.501 0.1123 12.759 0.1129 .7723
M&A 93.292 0.3204 10.47 0.3551 .0000 97.284 0.3193 6.478 0.3936 .0000 88.265 0.3136 15.497 0.3830 .0000
Note: This table shows summary statistics of the variables derived from financial statement data for a sample including only those firm years which are classified to have optimistic managers (Optim = 1) compared to a sample
which includes those firm years which are classified to have no optimistic managers (Optim = 0). The categorization is made according to the optimism dummies regarding the CEO (Optim_CEO), all officers except the CEO
(Optim_O), as well as all officers and directors except the CEO (Optim_OD). Inv. intensity denotes the investment intensity and Diff the difference. The table further displays p-values from two-sided t-tests and Wilcoxon-
Mann-Whitney tests for dummy variables, respectively, whether the mean and the distribution, respectively, of the variable is different for the two subsamples. For a detailed definition of the variables, please refer to Table A1 in
the Appendix.
  
|   11
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12       HEIZER and RETTIG

T A B L E 4   Net debt issuance

Dependent variable: Net debt issuance (Debt)

(1) (2) (3) (4) (5) (6) (7) (8)

FDt 0.1620*** 0.1604*** 0.1607*** 0.1600*** 0.1591*** 0.1575*** 0.1574*** 0.1563***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔProfitabilityt −0.0103** −0.0100** −0.0099** −0.0098* −0.0098* −0.0101** −0.0100** −0.0100**
(0.0420) (0.0487) (0.0495) (0.0530) (0.0524) (0.0443) (0.0464) (0.0479)
ΔTangibilityt 0.0427*** 0.0428*** 0.0427*** 0.0427*** 0.0426*** 0.0424*** 0.0425*** 0.0424***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔLn(Sales)t 0.0172*** 0.0170*** 0.0171*** 0.0171*** 0.0170*** 0.0170*** 0.0170*** 0.0169***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔQt −0.0052*** −0.0052*** −0.0052*** −0.0052*** −0.0052*** −0.0051*** −0.0051*** −0.0051***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Leveraget−1 −0.1826*** −0.1824*** −0.1817*** −0.1818*** −0.1818*** −0.1814*** −0.1815*** −0.1815***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt 0.0028** 0.0024* 0.0024* 0.0024* 0.0014
(0.0292) (0.0569) (0.0845) (0.0581) (0.3694)
Optim_CEOt x FDt 0.0277* 0.0158 0.0224 0.0068 0.0205
(0.0692) (0.3037) (0.1814) (0.6689) (0.3067)
Optim_Ot 0.0027* 0.0019 0.0017
(0.0923) (0.2296) (0.4039)
Optim_Ot x FDt 0.0501*** 0.0431** 0.0597**
(0.0096) (0.0265) (0.0183)
Optim_ODt 0.0029*** 0.0023** 0.0018
(0.0067) (0.0336) (0.1383)
Optim_ODt x FDt 0.0432*** 0.0406*** 0.0472***
(0.0028) (0.0081) (0.0089)
Optim_CEOt x 0.0006
Optim_Ot (0.8341)
Optim_CEOt x −0.0355
Optim_Ot x FDt (0.3605)
Optim_CEOt x 0.0021
Optim_ODt (0.3587)
Optim_CEOt x −0.0268
Optim_ODt x FDt (0.3806)
Firm controls x FD Yes
Firm-fixed effects Yes
Year-fixed effects Yes
Observations 68,223 68,223 68,223 68,223 68,223 68,223 68,223 68,223
Number of firms 9,599 9,599 9,599 9,599 9,599 9,599 9,599 9,599
Adjusted R2 0.3524 0.3530 0.3530 0.3533 0.3535 0.3534 0.3535 0.3535
Note: This table shows results from regressions in which the dependent variable is the level of net debt issuance. The independent variables include the financial
deficit, changes in profitability, tangibility, the natural logarithm of sales and Q, as well as leverage. Further, the regressions include optimism dummies regarding the
CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the CEO (Optim_OD). All independent variables are interacted
with the financial deficit variable. All regressions include firm- and year-fixed effects. The estimation of standard errors allows for clustering on the firm level.
Numbers in parentheses indicate p-values. For a detailed definition of the variables please refer to Table A1 in the Appendix. Bold indicates statistically significant
value.
*Indicates significance at 10%.
**Indicates significance at 5%.
***Indicates significance at 1%.
HEIZER and RETTIG   
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   13

T A B L E 5   Net equity issuance

Dependent variable: Net equity issuance (Equity)

(1) (2) (3) (4) (5) (6) (7) (8)

FDt 0.7436*** 0.7451*** 0.7451*** 0.7456*** 0.7463*** 0.7498*** 0.7496*** 0.7499***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔProfitabilityt 0.0095 0.0092 0.0092 0.0090 0.0090 0.0094 0.0094 0.0094
(0.1679) (0.1830) (0.1864) (0.1929) (0.1921) (0.1732) (0.1732) (0.1743)
ΔTangibilityt −0.0250*** −0.0251*** −0.0250*** −0.0250*** −0.0249*** −0.0246*** −0.0246*** −0.0246***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔLn(Sales)t −0.0112*** −0.0110*** −0.0111*** −0.0111*** −0.0110*** −0.0109*** −0.0110*** −0.0110***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔQt 0.0050*** 0.0049*** 0.0049*** 0.0049*** 0.0049*** 0.0048*** 0.0048*** 0.0048***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Leveraget−1 0.2354*** 0.2353*** 0.2344*** 0.2346*** 0.2346*** 0.2338*** 0.2340*** 0.2340***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt −0.0041*** −0.0040*** −0.0045*** −0.0043*** −0.0040**
(0.0069) (0.0097) (0.0076) (0.0047) (0.0489)
Optim_CEOt x FDt −0.0262 −0.0116 −0.0172 0.0046 0.0003
(0.2946) (0.6511) (0.5339) (0.8592) (0.9939)
Optim_Ot −0.0026 −0.0013 −0.0023
(0.1910) (0.5050) (0.3475)
Optim_Ot x FDt −0.0580* −0.0528 −0.0670
(0.0813) (0.1249) (0.1494)
Optim_ODt −0.0025** −0.0014 −0.0013
(0.0491) (0.2681) (0.3601)
Optim_ODt x FDt −0.0586** −0.0602** −0.0623**
(0.0103) (0.0129) (0.0272)
Optim_CEOt x 0.0021
Optim_Ot (0.5664)
Optim_CEOt x 0.0302
Optim_Ot x FDt (0.6554)
Optim_CEOt x −0.0006
Optim_ODt (0.8279)
Optim_CEOt x 0.0086
Optim_ODt x FDt (0.8631)
Firm controls x FD Yes
Firm-fixed effects Yes
Year-fixed effects Yes
Observations 68,223 68,223 68,223 68,223 68,223 68,223 68,223 68,223
Number of firms 9,599 9,599 9,599 9,599 9,599 9,599 9,599 9,599
Adjusted R2 0.7471 0.7474 0.7472 0.7474 0.7474 0.7475 0.7476 0.7476
Note: This table shows results from regressions in which the dependent variable is the level of net equity issuance. The independent variables include the financial
deficit, changes in profitability, tangibility, the natural logarithm of sales and Q, as well as leverage. Further, the regressions include optimism dummies regarding the
CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the CEO (Optim_OD). All independent variables are interacted
with the financial deficit variable. All regressions include firm- and year-fixed effects. The estimation of standard errors allows for clustering on the firm level.
Numbers in parentheses indicate p-values. For a detailed definition of the variables please refer to Table A1 in the Appendix. Bold indicates statistically significant
value.
*Indicates significance at 10%.
**Indicates significance at 5%.
***Indicates significance at 1%.
 |
14       HEIZER and RETTIG

T A B L E 6   Investment-cash flow sensitivity

Dependent variable: Investment intensity – Industry Investment intensity

(1) (2) (3) (4) (5) (6) (7) (8)

CFt 0.0502*** 0.0461*** 0.0471*** 0.0449*** 0.0440*** 0.0446*** 0.0432*** 0.0430***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Tangibilityt−1 0.0264*** 0.0263*** 0.0262*** 0.0263*** 0.0263*** 0.0262*** 0.0262*** 0.0262***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Ln (Sales)t−1 −0.0179*** −0.0179*** −0.0179*** −0.0179*** −0.0179*** −0.0179*** −0.0179*** −0.0179***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Qt−1 0.0167*** 0.0167*** 0.0167*** 0.0167*** 0.0167*** 0.0167*** 0.0167*** 0.0167***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Leveraget−1 −0.1244*** −0.1248*** −0.1247*** −0.1249*** −0.1251*** −0.1246*** −0.1248*** −0.1248***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt 0.0003 0.0009 0.0008 0.0003 −0.0015
(0.9058) (0.7159) (0.7494) (0.9130) (0.6155)
Optim_CEOt x 0.0309** 0.0226* 0.0321** 0.0198 0.0216
CFt (0.0189) (0.0913) (0.0274) (0.1576) (0.2232)
Optim_Ot −0.0022 −0.0022 −0.0035
(0.4405) (0.4502) (0.3837)
Optim_Ot x CFt 0.0393** 0.0287 0.0586**
(0.0273) (0.1156) (0.0282)
Optim_ODt 0.0002 0.0004 −0.0006
(0.9142) (0.8383) (0.8037)
Optim_ODt x CFt 0.0317** 0.0246* 0.0266
(0.0158) (0.0818) (0.1277)
Optim_CEOt x 0.0009
Optim_Ot (0.8730)
Optim_CEOt x −0.0556
Optim_Ot x CFt (0.1205)
Optim_CEOt x 0.0038
Optim_ODt (0.3858)
Optim_CEOt x −0.0042
Optim_ODt x CFt (0.8788)
Firm-fixed effects Yes
Year-fixed effects Yes
Observations 68,558 68,558 68,558 68,558 68,558 68,558 68,558 68,558
Number of firms 9,678 9,678 9,678 9,678 9,678 9,678 9,678 9,678
2
Adjusted R 0.0536 0.0537 0.0537 0.0538 0.0538 0.0537 0.0538 0.0537
Note: This table shows results from regressions in which the dependent variable is investment intensity minus the yearly mean of investment intensity of firms with the
same 2-digit SIC industry classification. The independent variables include the cash flow, tangibility, the natural logarithm of sales and Q, as well as leverage. Further,
the regressions include optimism dummies regarding the CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the
CEO (Optim_OD). All independent variables are interacted with the cash flow variable. All regressions include firm- and year-fixed effects. The estimation of standard
errors allows for clustering on the firm level. Numbers in parentheses indicate p-values. For a detailed definition of the variables please refer to Table A1 in the
Appendix. Bold indicates statistically significant value.
*Indicates significance at 10%.
**Indicates significance at 5%.
***Indicates significance at 1%.

other than the CEO are optimistic. This indicates that CEO optimism has little influence on capital structure choices (given
financing deficit) if it is not shared by other relevant decision-makers. In contrast, in all specifications, the coefficients of the
interaction terms between Optim_O and FD as well as Optim_OD and FD on net debt issuance are statistically significant,
even if the CEO is not optimistic. For net equity issuances, we mostly find a significant effect only for Optim_OD, indicating
the importance of the board of directors for decisions on equity issuances. This is intuitive as the board represents the interest
HEIZER and RETTIG   
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   15

T A B L E 7   Mergers and acquisitions

Dependent variable: M&A activity

(1) (2) (3) (4) (5) (6) (7) (8)

Industry_M&At 0.1976*** 0.1973*** 0.1975*** 0.1973*** 0.1973*** 0.1973*** 0.1971*** 0.1972***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
CFt−1 −0.1815** −0.1733* −0.1665* −0.1637* −0.1634* −0.1684* −0.1652* −0.1655*
(0.0397) (0.0501) (0.0596) (0.0644) (0.0649) (0.0568) (0.0620) (0.0615)
Tangibilityt−1 0.1889*** 0.1886*** 0.1864*** 0.1864*** 0.1864*** 0.1875*** 0.1875*** 0.1872***
(0.0026) (0.0027) (0.0030) (0.0030) (0.0030) (0.0028) (0.0028) (0.0029)
Ln (Sales)t−1 0.2971*** 0.2970*** 0.2956*** 0.2956*** 0.2955*** 0.2957*** 0.2958*** 0.2959***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Qt−1 0.0751*** 0.0758*** 0.0758*** 0.0761*** 0.0761*** 0.0756*** 0.0759*** 0.0758***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Leveraget−1 −1.9317*** −1.9359*** −1.9339*** −1.9356*** −1.9358*** −1.9350*** −1.9369*** −1.9365***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt 0.0581 0.0262 0.0417 0.0303 0.0001
(0.1428) (0.5261) (0.3630) (0.4655) (0.9991)
Optim_Ot 0.1488*** 0.1398*** 0.1743***
(0.0023) (0.0059) (0.0098)
Optim_OD t 0.0891*** 0.0813** 0.0653
(0.0098) (0.0245) (0.1136)
Optim_CEOtx −0.0762
Optim_Ot (0.4370)
Optim_CEOtx 0.0634
Optim_ODt (0.4205)
Firm-fixed Yes
effects
Year-fixed Yes
effects
Observations 45,610 45,610 45,610 45,610 45,610 45,610 45,610 45,610
Number of firms 4,671 4,671 4,671 4,671 4,671 4,671 4,671 4,671
Note: This table shows results from logit regressions in which the dependent variable equals one if net assets from acquisitions are greater than 0, and 0 otherwise.
The independent variables include the industry M&A intensity, beginning of the year cash flow, tangibility, the natural logarithm of sales, Q, leverage. Further, the
regressions include optimism dummies regarding the CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the CEO
(Optim_OD). All regressions include firm- and year-fixed effects. The estimation of standard errors allows for clustering on the firm level. Numbers in parentheses
indicate p-values. For a detailed definition of the variables please refer to Table A1 in the Appendix. Bold indicates statistically significant value.
*Indicates significance at 10%.
**Indicates significance at 5%.
***Indicates significance at 1%.

of shareholders. In sum, our results support Hypothesis H1: Optimism among the TMT and directors significantly increases
the interdependence between a firm's financial deficit and its capital structure choices – this also holds true if the CEO is not
optimistic.
Tables A2 and A3 in the Appendix investigate the influence of managerial optimism on the likelihood of equity and debt is-
sues, conditioned on entering external capital markets (Malmendier et al., 2011; Malmendier & Zheng, 2012). They display re-
sults from logit regressions, in which the dependent variable is a dummy variable, which equals one if there is a net debt (equity)
issuance in a fiscal year, and zero otherwise. The coefficients of our optimism measures have the predicted positive (negative)
influence. However, the financing deficit framework is superior to this approach since it is not restricted to the sample of firm
years with capital issues and does not neglect general financing needs, which can additionally differ for optimistic managers.
Our results are in line with Malmendier et al. (2011), who also find a significant influence of CEO optimism on the sensi-
tivity of net debt issues to the net financing deficit. Sen and Tumarkin (2015) find evidence for a connection with regard to the
majority of their CEO optimism measures. Contrarily, Malmendier and Zheng (2012) argue that CFO rather than CEO beliefs
 |
16       HEIZER and RETTIG

dominate in determining external financing. In order to ensure that our results are not mainly driven by CFO optimism, we also
conducted our regressions with CFO optimism. The results suggest that an optimistic CFO is not decisive for capital structure
decisions. This further corroborates our assumption that individual managers are not as crucial for capital structure decisions
as the attitudes of the TMT as a whole.

7.2  |  Optimism and investment behavior

Hypothesis H2 states that TMT optimism leads to an increase in the investment-cash flow sensitivities. Table 6 presents regres-
sion results from regression Equation (3). Again, we run regressions which include only the three optimism measures sepa-
rately (columns (2), (3), and (6)) and regressions which include Optim_CEO and Optim_O (columns (4) and (5)) or Optim_OD
(columns (7) and (8)), respectively. The results indicate that CEO optimism has a significant influence on the interdependence
between investment intensity and cash flows. This is in line with findings from Malmendier and Tate (2005, 2015), Lin, Hu and
Chen (2008) for listed companies in Taiwan and Huang et al. (2011) for listed companies in China. The effect is also significant
if we control for Optim_O, that is, if at least two other officers are optimistic, but not if we control for Optim_OD, that is, if at
least two other officers or board members are optimistic. The estimated coefficients of the interaction terms between Optim_O
and cash flows are significantly positive, independent from whether the CEO is optimistic or not. These findings underpin our
understanding of decision making in firms as team work. Even though we are the first to investigate the influence of non-CEO
TMT member optimism versus CEO optimism explicitly, our findings are in line with previous studies which cast doubt on
the unconditional impact of CEO optimism on corporate investment patterns. According to the survey of Graham, Harvey,
and Puri (2015) CEOs state to delegate investment decisions most. Further, Ben-David et al. (2013) find a significant effect of
CFO optimism on investment intensity. We repeated our analyses for CFO optimism and find a significant effect on invest-
ment intensity if the CEO is not optimistic, albeit smaller than the effect of TMT optimism in our initial regression analysis.
Accordingly, Glaser et al. (2008) find suggestive evidence for Germany that optimism of other managers apart from the CEO
also explains corporate investment patterns.
The regression results presented in Table 7 shed light on hypothesis H3, i.e., whether TMT optimism leads to an increase
in a firm's M&A activity. Thus, we implement Equation (4) within a logit regression framework. In contrast to previous liter-
ature (e.g., Ferris et al., 2013; Malmendier & Tate, 2008), the estimated coefficient for CEO optimism (Optim_CEO) is not
significant if we analyze CEO optimism separately. Optim_O, that is, the optimism of two or more officers except the CEO,
has a large and significant impact on M&A activity in all specifications, independently of whether the CEO is optimistic or not.
Optim_OD, that is, optimism of officers and directors except the CEO, is also significantly positive if analyzed separately, but
loses significance if the CEO is not optimistic. This is intuitive as we expect officers to be more involved in strategic decisions
than directors, especially concerning small acquisitions. We also test for the influence of CFO optimism only. Again, we find a
positive influence of CFO optimism on M&A activity, albeit smaller than the effect of TMT optimism in our initial regression
analysis. In sum, our results indicate that even if CEOs claim themselves to be the dominant decision-makers in M&A decisions
(Graham et al., 2015), their discretionary power depends on the other members of the TMT. Our findings might help explain
why several other studies have trouble to find a robust connection between CEO optimism and firm acquisition behavior. For
instance, results from Glaser et al. (2008) indicate that only those optimism variables which consider all of a firm's managers
have a significant influence on M&A activity, whereas the effect of CEO optimism is insignificant.

8  |   CO NC LU SION
Our findings suggest that previous research has overrated the influence of CEO optimism on corporate decisions. Applying our
net purchase optimism measures for the CEO as well as the rest of the TMT and board of directors on a large and representative
U.S. firm panel of 20 years, we confirm the finding of previous studies that CEO optimism influences corporate financing and
investment decisions. However, we also find that this effect is overshadowed by the optimism of other officers (and directors)
as a group. Specifically, the impact of CEO optimism depends on the optimism of other TMT members and directors. In con-
trast, optimism among TMT and board of directors has a strong and significant influence on corporate decisions, independently
from whether the CEO is optimistic or not. This implies that firm decisions are made in teams and that two or more optimistic
team members are enough to significantly influence corporate decisions. Thus, our results support ideas from strategic manage-
ment literature, which see firm decisions and outcomes as a result of a firm's entire TMT attitudes (Claussen, Matsen, Øistein,
& Torvik, 2012).
HEIZER and RETTIG   
|
   17

Our approach for assessing TMT optimism leaves room for several refinements and follow-up analyses. For instance, we
do not take into account TMT and board size when constructing our measures. Hence, we cannot evaluate the fraction of the
management team which is represented by, for instance, two officers. Further analyses should investigate whether our results
depend on the power which the CEO has over other top executives and the board. Accordingly, Adams, Almeida, and Ferreira
(2005) document that the impact of CEO characteristics on firm outcomes depends on organizational variables and the CEO’s
power measured by her formal position and titles. Further, Silveira and Barros (2012) report that for a majority of companies
with split Chairman and CEO roles, chairmen could be considered more relevant decision-makers than their respective CEOs.
Hence, the influence of individual managers seems to be inconsistent across firms and calls for consideration.

ORCID
Laura R. Rettig  https://orcid.org/0000-0002-8011-7115

ENDNOTES
1 We use the term optimism rather than over-optimism since the latter implies an irrational, non-realistic aspect, which we are not able to clearly identify.
We also refer to literature on overconfidence since the terms optimism and overconfidence are closely related and are often used to describe the same
phenomenon. Theory distinguishes between optimism which results in an overestimation of the mean of future outcomes, and overconfidence as equiva-
lent to miscalibration, which leads to an underestimation of confidence intervals (Heaton, 2002; Hackbarth, 2008). More broadly, overconfidence is also
described as the tendency to overestimate one's knowledge and abilities (Langer, 1975; Svenson, 1981; Moore & Healy, 2008).
2 For an overview of studies which show that the composition and attributes of the entire TMT are important, see Carpenter et al., 2016. Further,
Finkelstein, Hambrick and Cannella (2009) give a literature review on the role of TMT within the strategic leadership literature.
3 Note that the latter is of particular importance since the introduction of FAS 123R in 2005 required all firms to record an expense for all options granted,
which led to a sharp reduction in the number of stock options granted to top executives and rise of alternative compensation instruments (Murphy, 2013).
4 Further, Custόdio, et al. 2014 show that financial expert CEOs lead to less cash, more debt, and more dividend payments. Custόdio, et al. 2014;
Bennedsen, Perez-Gonzalez, Wolfenzon 2011 identify a harmful influence of CEOs’ deaths on firms’ profitability, investment, and sales growth.
5 For a comprehensive overview on the role of boards, see Adams, Hermalin and Weisbach (2010).
6 See also Croci, Petmezas and Vagenas-Nanos (2010) and Sen and Tumarkin (2015). Further, empirical analyses find connections between CEO opti-
mism and payout policy (Deshmukh, Goel & Howe, 2013), cash policy (Huang-Meier, Lambertides & Steeley, 2016), accounting conservatism (Ahmed
& Duellman, 2013), and firm diversification (Andreou, Doukas & Louca, 2011).
7 See, for instance, Croci, Petmezas, and Vagenas-Nanos (2010), Campbell et al. (2011), Galasso and Simcoe (2011), Hirshleifer, Low, and Teoh (2012),
Deshmukh, Goel, and Howe (2013), Hribar and Yang (2016), Huang-Meier, Lambertides, and Steeley (2016) and Sen and Tumarkin (2015).
8 Table A1 in the Appendix includes definitions of all variables.
9 Accordingly, Ben-David, Graham and Harvey (2013) show that aggregated overconfidence among managers is worst during periods of high uncertainty.
Further, Inoue, Kato and Yamasaki (2012) reveal less (more) optimistic managerial forecasts during high (low) growth periods. On an individual level,
Billett and Qian (2008) find evidence that managers credit initial success to their own ability and therefore turn more overconfident over time. At the
same time, findings of Kolasinski and Li (2013) suggest that overconfidence diminishes if managers feel its negative consequences. These results justify
the implementation of a time-variant optimism proxy.
10 If an insider's position changes within a fiscal year, this insider is considered in both position categories for this fiscal year.
11 We also test this specification within a logit framework as a robustness check, see Tables A2 and A3.
12 Note that our results are robust to excluding these years.

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How to cite this article: Heizer T, Rettig LR. Top management team optimism and its influence on firms' financing
and investment decisions. Rev Financ Econ. 2020;00:1–22. https​://doi.org/10.1002/rfe.1092
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20       HEIZER and RETTIG

T A B L E A 1   Variable definition

Variable Description/definition
Optim_CEO Dummy variable which equals one if the CEO of a firm is a net buyer in shares of her firm's stock in a fiscal year, and zero
otherwise
Optim_O Dummy variable which equals one if two or more officers of a firm apart from the CEO are net buyers in shares of their
firm's stock in a fiscal year, and zero otherwise
Optim_OD Dummy variable which equals one if two or more officers or directors of a firm apart from the CEO are net buyers in shares
of their firm's stock in a fiscal year, and zero otherwise
Debt Long-term debt issuance (dltis, set to zero if missing) minus long-term debt reduction (dltr, set to zero if missing), all
divided by total assets (at) at the end of the previous fiscal year. This variable is winsorized at 1%/99%
Debt_dummy Dummy variable which equals one if Debt is greater than zero, and zero otherwise
Equity Sales of common and preferred stock (sstk, set to zero if missing) minus purchases of common and preferred stock (prstkc,
set to zero if missing), all divided by total assets (at) at the end of the previous fiscal year. This variable is winsorized at
1%/99%
Equity_dummy Dummy variable which equals one if Equity is greater than zero, and zero otherwise
FD Cash dividends (dv, set to zero if missing) plus investment plus change in working capital minus cash flow after interest and
taxes, all divided by total assets (at) at the end of the previous fiscal year. This variable is winsorized at 1%/99%
Net investment Compustat items capx+ivch+aqc+fuseo-sppe-siv for firms with cash flow format code 1 to 3; and capx+ivch+aqc-sppe-siv-
ivaco for firms with cash flow format code 7; all set to zero if missing
ΔWorking Compustat items wcapc+chech for firms with cash flow format code 1; and is items -wcapc+chech for firms with cash flow
Capital format code 2 and 3; and items -recch-invch-apalch-txach-aoloch+chech-fiao-ivstch for firms with cash flow format code
7; all set to zero if missing
Cash flow after Compustat items ibc+xidoc+dpc+txdc+esubc+sppiv+ fopo+fsrco for firms with cash flow format code 1 to 3; and is items
interest and ibc+xidoc+dpc+ txdc+esubc+sppiv+fopo+exre for firms with cash flow format code 7; all set to zero if missing
taxes
Profitability Operating income before depreciation (oibdp), divided by total assets (at) at the end of the previous fiscal year. This variable
is winsorized at 1%/99%
ΔProfitability Unwinsorized profit minus unwinsorized profit at the end of the previous fiscal year. This variable is winsorized at 1%/99%
Tangibility Total property, plant, and equipment (ppegt, set to zero if missing) divided by total assets (at) at the end of the previous
fiscal year. This variable is winsorized at 1%/99%
ΔTangibility Unwinsorized Tang minus unwinsorized Tang at the end of the previous fiscal year. This variable is winsorized at 1%/99%
Ln(Sales) Natural logarithm of total sales (at, in millions of Dollars). This variable is winsorized at 1%/99%
ΔLn(Sales) Unwinsorized Ln(Sales) minus unwinsorized Ln(Sales) at the end of the previous fiscal year. This variable is winsorized at
1%/99%
Q Ratio of market value of assets to book value of assets (at). Market value of assets is defined as book value of assets plus
market equity minus book equity. Market equity is defined as Compustat items csho*prcc_f. Book equity is calculated as
seq.This variable is winsorized at 1%/99%
ΔQ Unwinsorized Q minus unwinsorized Q at the end of the previous fiscal year. This variable is winsorized at 1%/99%
Leverage Total debt (lt) divided by total assets (at). This variable is winsorized at 1%/99%
Investment Capital expenditures (item capx) + change in investments (item ivch) + acquisitions (item AQC) – sales of property, plant
intensity and equipment (item SPPE) – sale of investments (item SIV), divided by total assets (at) at the end of the previous fiscal
year. This variable is winsorized at 1%/99%
Industry Yearly mean of investment intensity of firms with the same 2-digit SIC industry classification
investment
intensity
Cash flow Earnings before interest and taxes (ib) plus depreciation, amortization, and depletion (dp, set to zero if missing), all divided
by total assets (at) at the end of the previous fiscal year. This variable is winsorized at 1%/99%
M&A Dummy variable which equals one if net assets from acquisitions (acq) is greater than zero, and zero if it is zero or missing
Industry_M&A One plus the natural logarithm of the yearly sum of net assets from acquisitions (acq) of firms with the same 2-digit SIC
industry classification divided by the yearly sum of year end market capitalization (mkvalt) of firms with the same 2-digit
SIC industry classification
HEIZER and RETTIG   
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   21

T A B L E A 2   Net debt issuance – logit regressions

Dependent variable: Net debt issuance dummy (Debt_dummy)

(1) (2) (3) (4) (5) (6) (7) (8)

ΔProfitabilityt −0.5738*** −0.5720*** −0.5747*** −0.5734*** −0.5731*** −0.5677*** −0.5674*** −0.5674***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔTangibilityt 0.8703*** 0.8731*** 0.8744*** 0.8756*** 0.8749*** 0.8735*** 0.8746*** 0.8741***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔLn (Sales)t 0.3241*** 0.3271*** 0.3256*** 0.3275*** 0.3270*** 0.3260*** 0.3273*** 0.3271***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔQt −0.1055*** −0.1048*** −0.1045*** −0.1042*** −0.1042*** −0.1029*** −0.1027*** −0.1026***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Leverage t−1 −1.6644*** −1.6747*** −1.6704*** −1.6768*** −1.6764*** −1.6804*** −1.6841*** −1.6850***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt 0.1338*** 0.0940** 0.1271** 0.0640 0.1228*
(0.0023) (0.0400) (0.0131) (0.1653) (0.0530)
Optim_Ot 0.2022*** 0.1700*** 0.2376***
(0.0001) (0.0021) (0.0011)
Optim_ODt 0.2154*** 0.1987*** 0.2273***
(0.0000) (0.0000) (0.0000)
Optim_CEOtx −0.1533
Optim_O t (0.1521)
Optim_CEOtx −0.1348
Optim_ODt (0.1288)
Firm-fixed Yes
effects
Year-fixed Yes
effects
Observations 35.227 35.227 35.227 35.227 35.227 35.227 35.227 35.227
Number of 4.654 4.654 4.654 4.654 4.654 4.654 4.654 4.654
firms
Pseudo-R2 0.0009 0.0009 0.0009 0.0009 0.0009 0.0009 0.0009 0.0009
Note: This table shows results from logit regressions in which the dependent variable is a dummy which equals one if net debt issuance is greater than 0, and 0
otherwise. The independent variables include changes in profitability, tangibility, the natural logarithm of sales and Q, as well as leverage. Further, the regressions
include optimism dummies regarding the CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the CEO (Optim_
OD). All regressions include firm- and year-fixed effects. Numbers in parentheses indicate p-values. For a detailed definition of the variables please refer to Table A1
in the Appendix. Bold indicates statistically significant value.
*Indicates significance at 10%. Bold indicates statistically significant value.
**Indicates significance at 5%.
***Indicates significance at 1%.
 |
22       HEIZER and RETTIG

T A B L E A 3   Net equity issuance – logit regressions

Dependent variable: Net equity issuance dummy (Equity_dummy)

(1) (2) (3) (4) (5) (6) (7) (8)

ΔProfitabilityt 0.1162 0.1108 0.1066 0.1044 0.1045 0.1041 0.1023 0.1025
(0.4969) (0.5166) (0.5327) (0.5414) (0.5408) (0.5423) (0.5494) (0.5488)
ΔTangibilityt −0.2460*** −0.2461*** −0.2446*** −0.2448*** −0.2448*** −0.2421*** −0.2424*** −0.2426***
(0.0013) (0.0013) (0.0014) (0.0014) (0.0014) (0.0016) (0.0016) (0.0016)
ΔLn (Sales)t 0.3359*** 0.3358*** 0.3336*** 0.3338*** 0.3336*** 0.3345*** 0.3346*** 0.3345***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
ΔQt −0.0024 −0.0032 −0.0038 −0.0041 −0.0043 −0.005 −0.0052 −0.0052
(0.9097) (0.8808) (0.8569) (0.8447) (0.8405) (0.8140) (0.8073) (0.8049)
Leveraget−1 2.2977*** 2.3077*** 2.3080*** 2.3132*** 2.3134*** 2.3138*** 2.3178*** 2.3180***
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
Optim_CEOt −0.1428** −0.0819 −0.0996 −0.0710 −0.0647
(0.0155) (0.1834) (0.1541) (0.2494) (0.4638)
Optim_Ot −0.2817*** −0.2549*** −0.2854***
(0.0000) (0.0004) (0.0018)
Optim_ODt −0.2238*** −0.2068*** −0.2044***
(0.0000) (0.0001) (0.0003)
Optim_CEOtx 0.0737
Optim_Ot (0.5941)
Optim_CEOtx −0.0119
Optim_ODt (0.9199)
Firm-fixed Yes
effects
Year-fixed Yes
effects
Observations 23,707 23,707 23,707 23,707 23,707 23,707 23,707 23,707
Number of 3,010 3,010 3,010 3,010 3,010 3,010 3,010 3,010
firms
Note: This table shows results from logit regressions in which the dependent variable is a dummy which equals one if net equity issuance is greater than 0, and 0
otherwise. The independent variables include changes in profitability, tangibility, the natural logarithm of sales and Q, as well as leverage. Further, the regressions
include optimism dummies regarding the CEO (Optim_CEO), all officers except the CEO (Optim_O), as well as all officers and directors except the CEO (Optim_
OD). All regressions include firm- and year-fixed effects. Numbers in parentheses indicate p-values. For a detailed definition of the variables please refer to Table A1
in the Appendix. Bold indicates statistically significant value.
*Indicates significance at 10%.
**Indicates significance at 5%.
***Indicates significance at 1%.