R&D investment-cash flow sensitivity under managerial optimism

The aim of this paper is to explore the effect of managerial optimism on the R&D cash-flow (hereafter, R&D ICF) sensitivity. Departing from 864 yearly observations between 108 public firms listed at the NYSE from 1999 to 2010, we construct a measure of managerial optimism as it described by Malmendier and Tate (2005) and we use a standard Q-model of investment. Our results report that firms with optimistic CEOs apply a strong positive and significant R&D ICF sensitivity. Running estimation for sub-sample firms, we find that the sensitivity of R&D investment to cash flows is stronger for more constrained group than the less constrained group.