Managerial sentiment and employment

Abstract

Recent research shows that managers, much like investors, are prone to sentiment. In this paper, we study the effect of managerial sentiment on firms’ operations both theoretically and empirically. Consistent with our model’s predictions, we find that high managerial sentiment increases employment growth, especially among firms with limited investment opportunities and regardless of their cash resources. We also show that high managerial sentiment offsets the negative effect of low investor sentiment and bad governance on employment, but ultimately leads to lower labor productivity. Overall, the findings unveil a new channel through which optimistic managers affect firms’ operations.