CEO Overconfidence and the Speed of Adjustment of Cash Holdings
65 Pages Posted: 3 Mar 2020
Date Written: March 2, 2020
We examine the link between CEO overconfidence and speed of adjustment (SOA) of cash holdings for listed US firms. We find a negative effect of overconfident CEOs on the SOA. Further, CEO overconfidence increases the asymmetry in the SOA between firms with excess cash and those with a cash deficit: The SOA is faster (slower) when there is excess cash (deficit). Importantly, we find that the SOA is value-relevant above and beyond cash holding levels. We address endogeneity concerns through difference-in-differences and propensity score matching specifications. Our results are robust to alternative measures of overconfidence, estimation methods, and corporate governance quality.
Keywords: cash holdings, speed of adjustment, CEO overconfidence, corporate governance, financial constraints, leverage
JEL Classification: G32, G34
Suggested Citation: Suggested Citation