Financially Constrained Firms: The Impact of Managerial Optimism and Diversification on Firms’ Excess Value: The Case of Greece

Dimitrios Maditinos, Alexandra Tsinani, Zeljko Sevic, Jelena Stankeviciene
European Research Studies Journal, Volume XXII, Issue 1, 3-15, 2019
EOI: 10.11214/thalassinos.22.01.001


Diversification as an underlying factor of financial constraints can create several costs. Diversified firms have the tendency to over-invest in lines of business which display poor investment opportunities. Diversification indeed reduces value. This loss in value is found mainly for firms of all sizes having managers with a higher level of optimism. The link between optimism and corporate investment is more pronounced in financially constraint firms. When the wedge between the internal and external cost of funds increases, a firm is more financially constrained. Analysing a sample of listed companies in Greece it is found that the higher the managerial optimism, the lower the excess value of a firm.

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