CEO-CFO Team Optimism: Commercial Real Estate Transactions and REIT Performance

Abstract

The literature regarding the effects of managerial optimism concentrates on CEOs, all but neglecting other members of the executive team. We evaluate the interplay of the optimism levels of the CEOs and CFOs of listed real estate investment trusts, and study the commercial real estate transactions made by the firms led by these teams. We find that firms led by optimistic CEO/CFO teams pay 3-3.2% more than their peers for their private asset acquisitions if the cash ratio increases by one percentage point. These firms also exhibit inferior stock performance following their asset acquisitions conditional on overpayment for the property. Conversely, diverse opinions between the CEO and CFO prevent firms from overpaying on their asset transactions, improving their stock performance relative to optimistic executives. Our findings suggest that diversity in terms of executive optimism is a soft governance mechanism with salience to firm performance.

Keywords: Executive team, optimism, overconfidence, counterbalance, private assets