Cash Flow Sensitivity and Managerial Optimism: Evidence From the UK
Abstract
The investment decisions of financially constrained firms are subject to various factors, one of which is the level of managerial optimism, a psychological construct that influences corporate decision-making and can significantly affect investment choices.This study aims to investigate the impact of managerial optimism on the investment decisions of financially constrained firms.In order to determine whether a company is financially constrained, a measure of optimism was employed, derived from the board of directors inside transactions and the Whited and Wu index.Data from UK-listed firms were analyzed to validate three discussion hypotheses: (1) optimism affects investment decisions; (2) optimism increases investment sensitivity to cash flow; and (3) this sensitivity is more prevalent in financially constrained firms.The results of this study demonstrate that the interaction between cash flow and managerial optimism significantly affects investment decisions and has a more substantial influence on financially constrained firms.