Do CEO Beliefs Affect Corporate Cash Holdings?
59 Pages Posted: 20 Feb 2015 Last revised: 2 Mar 2021
Date Written: November 9, 2018
We develop a model of corporate cash holdings that incorporates CEO beliefs. An optimistic CEO views external financing as excessively costly but expects this cost to moderate
over time. The optimistic CEO thus delays external financing while funding current investments with existing cash and maintaining a lower cash balance than rational CEOs. We find
that, relative to rational CEOs, optimistic CEOs hold 24% less cash, hold lower cash to fund
the firms' growth opportunities, and save less cash out of incremental cash flow.
Keywords: CEO; Overconfidence; Optimism; Cash Holdings; Corporate Finance; Behavioral Finance
JEL Classification: D82, D83, G24, G28, G31
Suggested Citation: Suggested Citation