Managerial optimism, CEO retention, and corporate performance: evidence from bankruptcy-filing firms

  • Mao-Wei Hung
  • Wen-Hsin TsaiEmail author


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.


Managerial optimism Management turnover Bankruptcy Emergence 

JEL classification

G32 G33 G40 



  1. Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Financ 23(4):589–609CrossRefGoogle Scholar
  2. Barniv R, Agarwal A, Leach R (2002) Predicting bankruptcy resolution. J Bus Financ Account 29(3):497–520CrossRefGoogle Scholar
  3. Ben-David I, Graham JR, Harvey CR (2013) Managerial miscalibration. Q J Econ 128(4):1547–1584CrossRefGoogle Scholar
  4. Bertrand M, Schoar A (2003) Managing with style: the effect of managers on firm policies. Q J Econ 118(4):1169–1208CrossRefGoogle Scholar
  5. Campbell TC, Gallmeyer M, Johnson SA, Rutherford J, Stanley BW (2011) CEO optimism and forced turnover. J Financ Econ 101(3):695–712CrossRefGoogle Scholar
  6. Denis DJ, Denis DK (1995) Performance changes following top management dismissals. J Financ 50(4):1029–1057CrossRefGoogle Scholar
  7. Denis DK, Rodgers KJ (2007) Chapter 11: duration, outcome, and post-reorganization performance. J Financ Quant Anal 42(1):101-118.CrossRefGoogle Scholar
  8. Eckbo BE, Thorburn KS, Wang W (2016) How costly is corporate bankruptcy for the CEO? J Financ Econ 121(1):210–229CrossRefGoogle Scholar
  9. Evans JH, Luo S, Nagarajan NJ (2014) CEO turnover, financial distress, and contractual innovations. Account Rev 89(3):959–990CrossRefGoogle Scholar
  10. Fahlenbrach R, Prilmeier R, Stulz R (2012) This time is the same: using bank performance in 1998 to explain bank performance during the recent financial crisis. J Financ 67(6):2139–2185CrossRefGoogle Scholar
  11. Gervais S, Heaton JB, Odean T (2011) Overconfidence, compensation contracts, and capital budgeting. J Financ 66(5):1735–1777CrossRefGoogle Scholar
  12. Gilson SC (1989) Management turnover and financial distress. J Financ Econ 25(2):241–262CrossRefGoogle Scholar
  13. Gilson SC (1997) Transactions costs and capital structure choice: evidence from financially distressed firms. J Financ 52(1):161–196CrossRefGoogle Scholar
  14. Gilson SC, John K, Lang LHP (1990) Troubled debt restructurings: an empirical study of private reorganization of firms in default. J Financ Econ 27(2):315–353CrossRefGoogle Scholar
  15. Goel AM, Thakor AV (2008) Overconfidence, CEO selection, and corporate governance. J Financ 63(6):2737–2784CrossRefGoogle Scholar
  16. Hackbarth D (2008) Managerial traits and capital structure decisions. J Financ Quant Anal 43(4):843–881CrossRefGoogle Scholar
  17. Heaton JB (2002) Managerial optimism and corporate finance. Financ Manag 31(2):33–45CrossRefGoogle Scholar
  18. Hirshleifer D, Low A, Teoh SH (2012) Are overconfident CEOs better Innovators. J Financ 67(4):1457–1498CrossRefGoogle Scholar
  19. Ho PH, Huang CW, Lin CY, Yen JF (2016) CEO overconfidence and financial crisis: evidence from bank lending and leverage. J Financ Econ 120(1):194–209CrossRefGoogle Scholar
  20. Hotchkiss ES (1995) Postbankruptcy performance and management turnover. J Financ 50(1):3–21CrossRefGoogle Scholar
  21. Ivashina V, Iverson B, Smith DC (2016) The ownership and trading of debt claims in chapter 11 restructuring. J Financ Econ 119(2):316–335CrossRefGoogle Scholar
  22. Jaggia S, Thosar S (2018) An evaluation of chapter 11 bankruptcy filings in a competing risks framework. J Econ Financ Accessed 06 October 2018CrossRefGoogle Scholar
  23. Jiang W, Li K, Wang W (2012) Hedge funds and Chapter 11. J Financ 67(2):513-560.CrossRefGoogle Scholar
  24. Kalay A, Singhal R, Tashjian E (2007) Is chapter 11 costly? J Financ Econ 84(3):772–796CrossRefGoogle Scholar
  25. Kaplan SN, Klebanov MM, Sorensen M (2012) Which CEO characteristics and abilities matter. J Financ 67(3):973–1007CrossRefGoogle Scholar
  26. Li K, Wang W (2016) Debtor-in-possession financing, loan-to-loan, and loan-to-own. J Corp Financ 39:121–138CrossRefGoogle Scholar
  27. Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Financ 89(6):2661–2700CrossRefGoogle Scholar
  28. Malmendier U, Tate G, Yan J (2011) Overconfidence and early-life experiences: the effect of managerial traits on corporate financial policies. J Financ 66(5):1687–1733CrossRefGoogle Scholar
  29. Ofek E (1993) Capital structure and firm response to poor performance. J Financ Econ 34(1):3–30CrossRefGoogle Scholar
  30. Otto CA (2014) CEO optimism and incentive compensation. J Financ Econ 114(2):366–404CrossRefGoogle Scholar
  31. Platt HD, Platt MB (2002) A re-examination of the effectiveness of the bankruptcy process. J Bus Financ Account 29(9):1209–1237CrossRefGoogle Scholar
  32. Skeel DA (2003) Creditors’ ball: the “new” corporate governance in chapter 11. U Pitt Law Rev 152:917–951CrossRefGoogle Scholar
  33. Tashjian E, Lease RC, McConnell JJ (1996) Prepacks: an empirical analysis of prepackaged bankruptcies. J Financ Econ 40(1):135–162CrossRefGoogle Scholar
  34. Weisbach AS (1995) The CEO and the firm’s investment decisions. J Financ Econ 37(2):159–188CrossRefGoogle Scholar
  35. White H (1980) A heteroskedasticity-consistent covariance matrix and a direct test for heteroskedasticity. Econometrica 48(4):817–838CrossRefGoogle Scholar

Copyright information

© Academy of Economics and Finance 2019

Authors and Affiliations

  1. 1.Department of International BusinessNational Taiwan UniversityTaipeiTaiwan

Personalised recommendations