Using data on 601 firms in the United States filing for bankruptcy protection from 1982 to 2013, this paper explores how managerial optimism and CEO retention affect corporate performance and bankruptcy resolution. Our results indicate that over the period leading to the filing, managerial optimism causes bankruptcy-filing firms to adopt more aggressive strategies in terms of cash policy and tapping the external debt market to meet fund requirements. The greater the optimism, the worse the bankruptcy performance and the less probable survival is. Furthermore, the presence of managerial optimism sheds light on the critical role for incumbent CEO retention in distressed firms. While an optimistic attitude is proven to be detrimental in bankruptcy-filing firms, retaining pre-filing CEOs in office, whether retained until the petition filing or through the bankruptcy resolution, mitigates the negative influences of managerial optimism on corporate performance and aids the firm to successfully survive bankruptcy protection. The tests validate the negative optimism effects and positive retention effects in bankruptcy-filing firms.
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