Financial system

Social psychology

Cash

Economics

Enterprise value

Business

Cash management

Psychology

Political science

Monetary economics

Cash and cash equivalents

Cash flow forecasting

Cash flow

Operating cash flow

Finance

Equity (law)

Cash flow statement

Overconfidence effect

Journal of Corporate Finance

This study proposes chief executive officer (CEO) overconfidence to be an alternative explanation to corporate cash holdings. We find positive effects of CEO overconfidence on the level of cash holdings and the value of cash, which are mainly due to the investment environments faced by firms. The positive effects of CEO overconfidence on cash holdings level and cash value are barely affected by the traditional motives of cash holdings based on trade-off and agency theories. The analysis of cash sources further explains why firms with overconfident CEOs can aggressively pursue risky investments and maintain large cash holdings at the same time. Although the prior literature indicates that overconfident CEOs tend to avoid equity issues for their capital investments, the contribution to cash savings from equity is higher than that from debt. Additional robustness tests also support our empirical findings.

CEO overconfidence and corporate cash holdings