It Is Not Optimism When You Know You Are Right: CEO Optimism and Self-Attribution

Abstract

Existing literature uses option-holding patterns to identify CEOs as permanently overconfident or
optimistic and finds such biases associated with investment and financing decisions damaging to
shareholder interests. This study finds that a significant part of CEOs’ optimistic behavior is a rational reaction to short-term conditions rather than, as previous scholarship posits, a permanent bias. While previous literature has focused exclusively on long-term CEO bias, this study examines the causes of annual variation in CEO optimism and finds support for the self-attribution hypothesis. This study proposes that CEO optimism which is not the result of self-attribution is justified by short-term conditions rather than caused by CEO bias. This has practical applications: allowing investors to identify biased CEOs and helping CEOs to recognize their own personal biases.