Is Chief Executive Officer optimistic belief bad for workers? Evidence from corporate employment decisions

Using a behavioural approach, we investigate how Chief Executive Officer optimism, defined as a personality trait where a person has optimistic beliefs about the outcome of future events, influences corporate employment decisions. Using data of publicly traded firms in the U.S. from 1995 to 2017, we show that firms with optimistic CEOs have higher employment growth and exhibit less pronounced employment sensitivity to declining sales than firms with non‐optimistic CEOs do. We also find that the impact of optimistic CEOs on employment decisions is larger in financially constrained firms. We deal with potential endogeneity issues with the entropy balancing method, propensity score matching and two‐stage least squares regression. Our findings have important implications for the design and implementation of Human Resource Management policies. Practitioner notes What is currently known? CEOs play an important role in the design and adoption of HRM policies and practices. CEO gender, environmental belief and incentives influence their HRM‐related decisions. CEOs' optimistic belief influences corporate policies, but little is known about its impact on HRM. What this paper adds? Empirical analysis with a large sample on the impact of CEOs' optimistic belief on employment decisions. Evidence that firms with optimistic CEOs have higher employment growth. Evidence that firms with optimistic CEOs fire less during bad times and this effect is more pronounced in financially‐constrained firms. The implications for practitioners HR practitioners can consider cognitive bias in HRM policies and practices. Evidence for HR practitioners in designing pay packages to align CEOs' incentives with those of employees. Evidence for HR practitioners in shaping/delivering HRM metrics that are important to firms and investors.