CEO Overconfidence and the Value of Corporate Cash Holdings

56 Pages Posted: 19 Nov 2015 Last revised: 13 Dec 2018

See all articles by Nihat Aktas

Nihat Aktas

WHU - Otto Beisheim School of Management

Christodoulos Louca

Cyprus University of Technology

Dimitris Petmezas

Durham University Business School

Date Written: December 12, 2018

Abstract

Cash holding is on average more valuable when firms are managed by overconfident CEOs. Economically, having an overconfident CEO on board is associated with an increase of $0.28 in the value of $1.00 cash holding. The positive effect of CEO overconfidence on the value of cash concentrates among firms that are more likely to suffer from the underinvestment problem (i.e., financially constrained firms which exhibit high growth opportunities). In addition, CEO overconfidence affects negatively the value of cash in firms that are financially unconstrained, a finding which is consistent with the overinvestment hypothesis. The results are robust to various tests and alternative explanations.

Keywords: CEO overconfidence, value of cash, growth opportunities, financial constraints, underinvestment

JEL Classification: G14, G30, G32

Suggested Citation

Aktas, Nihat and Louca, Christodoulos and Petmezas, Dimitris, CEO Overconfidence and the Value of Corporate Cash Holdings (December 12, 2018). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2692324 or http://dx.doi.org/10.2139/ssrn.2692324

Nihat Aktas

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Christodoulos Louca

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Dimitris Petmezas (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

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