CEO Overconfidence and the Speed of Adjustment of Cash Holdings

Abstract

We examine the links between CEO overconfidence, the speed of adjustment (SOA) of cash holdings, and firm value for listed US firms. First, we find that the SOA is value-relevant above and beyond the cash holdings level. Second and more importantly, we find a positive effect of CEO overconfidence on the SOA. We address endogeneity concerns through a difference-in-differences approach, propensity score matching, and entropy balancing. Our results are robust to the use of alternative estimation methods. Finally, we find that financial constraints, debt levels, and corporate governance quality affect the relation between CEO overconfidence and the SOA of cash holdings.

Keywords: cash holdings, speed of adjustment, CEO overconfidence, corporate governance, financial constraints, leverage

JEL Classification: G32, G34