Does CEO temporal myopia always lead to firm short-termism? The critical role of CEO optimism and perceived opportunity costs

Abstract

Literature suggests that chief executive officers (CEOs) often discount long-term returns more than short-term gains, resulting in firm short-termism. However, the findings from previous studies are not conclusive. Drawing on upper echelons theory, we argue that a CEO’s optimism about the firm’s future returns is a critical factor that influences the likelihood of CEO temporal myopia leading to firm short-termism. We further propose that the perceived opportunity costs of being short-term oriented can reshape the role of CEO optimism in converting temporal myopia to firm short-termism. Specifically, when a CEO’s compensation is dependent on the firm’s stock market performance, the perceived opportunity cost of being short-term focused is high, mitigating the negative impact of CEO optimism. However, when the CEO faces high environmental discretion that can help the firm maintain competitive advantage through alternative means, the perceived opportunity cost becomes lower, amplifying the adverse impact of CEO optimism.