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


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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Fig. 1


  1. 1.

    We follow Ben-David et al. (2013), who connect optimism with confidence, since they are likely to appear jointly.

  2. 2.

    Gilson (1989) finds that 52% of firms change their senior-level management immediately before bankruptcy; Platt and Platt (2002) indicate that 48% of firms replace the CEO prior to filing the restructure plan.

  3. 3.

    When managerial turnover becomes severe in distressed firms, there may be less exercisable option data applicable to evaluate the optimism of incoming CEOs given that the typical option has a ten-year duration and is fully vested by year five. There is also a smaller likelihood of exercising options in a depressed stock market in advance of filing.

  4. 4.

    In contrast to traditional Chapter 11 filing, prepackaged bankruptcies enable firms to file for bankruptcy with a reorganization plan already negotiated with creditors.

  5. 5.

    The distribution of asset size is positively skewed, with the top 1% of our bankrupt firms having a book value of assets over $50 billion. In comparison with the study in Jang, Li, and Wang (2012), who collect 474 bankrupt firms over the period from 1996 to 2007 from the same database, they present a similar median (mean) value of book assets at $706 ($2718) million and of cash holdings at 0.030 (0.068).

  6. 6.

    We calculate average industry-adjusted characteristics by finding the median of all the firms in the same two-digit SIC code industry, and subtracting the relevant median industry characteristics from the comparable characteristics for each firm in our sample.

  7. 7.

    Relative to negative median values, the positive mean value of the return on equity, 65.66%, does not represent profit in the firms, given that 39.43% of our bankrupt firms with negative stockholder equity are losing money. This raises the concern that using the measure yields the reverse of the typical situation for negative equity. For this reason, we employ the measure of operating performance as the main proxy for profitability in the following analysis.

  8. 8.

    We perform standard t-tests and Wilcoxon signed rank tests to compare the sample means and medians between the groups with and without emergence cases, showing similar results.

  9. 9.

    We perform a one-side t-test to examine whether optimistic firms have a lower Altman’s Z-score, and obtain t-statistics of −1.5235 at the 5% significance level, indicative of deteriorated credit quality.

  10. 10.

    We estimate variance inflation factor scores for explanatory variables in all regressions. Most values lie between 1 and 2, which suggests that multicollinearity has not biased our regression results.

  11. 11.

    The deviation between median and mean is large for some changes in accounting ratios. As the accounting ratio in the denominator is close to zero, minor movement can result in a large variety in the changes, magnifying the deviation in between. For an additional check, we follow Denis and Rodgers (2007) by redefining the change in ratios as ΔX = Xyear = 0-Xyear = −2 and conduct a similar analysis, as presented in Tables 2 and 3. We obtain a small deviation for the changes and similar findings for managerial optimism affecting changes with higher explanatory power.

  12. 12.

    Among 601 bankruptcy-filing firms, we have 162 optimistic firms and 439 non-optimistic firms, reducing the optimism ratio to 26.96%. Our two investment-based optimism measures are highly correlated (0.9004) indicating that the measures capture similar aspects of managerial optimism.

  13. 13.

    We exclude firms with SIC codes from 6000 to 6999.

  14. 14.

    The bankruptcy resolution date is the earlier date among the date when the court approves the sale of (substantially) all the assets of the firm, the date when the court confirms the restructure plan, and the date when the firm converts Chapter 11 to Chapter 7.

  15. 15.

    Finance firms have smaller tangible assets and a higher asset size. The median (mean) asset size in 432 non-finance bankrupt firms is $632($1966) million respective to $2846 ($9279) million in 51 finance bankrupt firms. The median (mean) ratio of tangible assets is 38.55% (40.91%) in non-finance firms and 1.16% (6.30%) in the finance industry.

  16. 16.

    We collect the option-holding data from the ExecuComp database and compute the realizable value per option as the total realizable value of the exercisable options divided by the number of exercisable options. Then we subtract the per-option realizable value from the stock price at the fiscal year end to obtain an estimate of the average exercise price of the options. The average percent moneyness of the options equals the per-option realizable value divided by the estimated average exercise price. We do not calculate the Longholder measure as the applicable option data on the expiration date reduces sample numbers to 47 bankrupt firms.

  17. 17.

    Stock transaction data are collected from Thomson Reuters in the WRDS database.

  18. 18.

    EPS forecast data are collected from IBES Guidance in the WRDS database.


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Correspondence to Wen-Hsin Tsai.

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Hung, MW., Tsai, WH. Managerial optimism, CEO retention, and corporate performance: evidence from bankruptcy-filing firms. J Econ Finan 44, 506–527 (2020).

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  • Managerial optimism
  • Management turnover
  • Bankruptcy
  • Emergence

JEL classification

  • G32
  • G33
  • G40