Do CEO Beliefs Affect Corporate Cash Holdings?
62 Pages Posted: 20 Feb 2015 Last revised: 16 Nov 2018
Date Written: November 9, 2018
We develop a dynamic 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, exhibit a lower change in cash holdings over time, hold lower cash to fund the firm's growth opportunities, and save less cash out of incremental cash flow.
Keywords: CEO optimism, cash holdings
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