CEO overconfidence and the value of corporate cash holdings

Aktas, Nihat; Louca, Christodoulos; Petmezas, Dimitris

doi:10.1016/j.jcorpfin.2018.11.006

Cited by 113 publications

(69 citation statements)

References 62 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…A manager's personality trait can influence a company's business risk through their business decisions and policies. Consistent with the upper echelon theory, a number of studies show support for the effect of overconfidence on corporate decisions, such as investment decisions (Malmendier & Tate, 2005), merger & acquisition decisions (Malmendier & Tate, 2008), cash holding decisions (Aktas, Louca, & Petmezas, 2019) tax decisions (Aliani et al, 2016;Chyz et al, 2014) and financial reporting decisions (Ahmed & Duellman, 2013).…”

Section: Managerial Overconfidence and Audit Feementioning

confidence: 75%

Overconfident Management and the Audit Fee Demand-Side Perspective

Kusharyanti

Kusuma

2020

Asian Economic and Financial Review

View full text Add to dashboard Cite

The issue of managerial overconfidence in managers has been studied in relation to audit pricing. Previous studies examined the relationship between managerial overconfidence and audit fees from the supply side. This study investigates the association of managerial overconfidence and audit fees from the demand side. We found a significant negative relationship between managerial overconfidence and audit fees. This finding supports the demand side perspective of audit pricing, specifically that overconfident management demands low quality audit services and subsequently low audit fees. In addition, we also investigated the role of the audit committee in the relationship between managerial overconfidence and audit fees, and found that a negative and significant relationship between managerial overconfidence and audit fees only occurred in companies with a strong audit committee. These findings suggest that a strong audit committee is able to offset the negative effect of managerial overconfidence by increasing monitoring of the financial reporting process, and auditors responds to this by reducing the level of risk of financial reporting and subsequently the audit fee. Contribution/Originality: This study contributes to the auditing field by providing empirical evidence on the impact of CEO characteristics (overconfidence) on audit fees from the demand side perspective. Other studies have examined the factors affecting audit fees from the supply-side perspective. 1. INTRODUCTION Previous research in audit pricing isolates management characteristics as a determinant of audit fees. Carcello, Hermanson, and Ye (2011) suggest the need to incorporate management into the analysis due to management's significant influence on accounting, auditing, and internal control. In line with this suggestion, recent research on the determinants of audit fees on the client side began to incorporate management attributes into their considerations, such as those of the chief executive officer (CEO) demographic characteristics (

show abstract

Section: Managerial Overconfidence and Audit Feementioning

confidence: 75%

Overconfident Management and the Audit Fee Demand-Side Perspective

Kusharyanti

Kusuma

2020

Asian Economic and Financial Review

View full text Add to dashboard Cite

show abstract

“…Pikulina et al (2017) document a positive relation between overconfidence and individuals' investment decisions. Aktas et al (2019) examine the influence of CEO overconfidence on the value of cash holding and find that CEO overconfidence contributes to the value of cash holding. Huang-Meier et al (2016), Deshmukh et al (2017) and Chen et al (2020) all directly investigate the influence of CEO optimism or overconfidence on corporate cash holding.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

“…This new measure may be preferable to existing measures because it is more feasible and less costly compared to experiments or surveys that must be carefully designed (Ben-David et al, 2013;Pikulina et al, 2017) and less likely to include corporate managers as respondents in a multi-year survey. Our measure is more direct relative to the measures inferred from managers' option exercise behavior, firm investment level (Malmendier and Tate, 2008;Campbell et al, 2011;Huang-Meier et al, 2016;Deshmukh et al, 2017;Chen et al, 2020), or media's description Tate, 2005, 2008;Aktas et al, 2019). More importantly, this new measure can be easily applied at all levels of financial market development because annual reports are formal and compulsory documents that all listed companies are required to disclose, whereas the data required to calculate other measures, such as option holding, are not always available, especially in immature markets.…”

Section: Introductionmentioning

confidence: 99%

Managerial optimism and corporate cash holdings

Trần

Hoang

2020

IJMF

View full text Add to dashboard Cite

PurposeThis paper examines the effects of managerial optimism on corporate cash holdings.Design/methodology/approachThe authors construct a novel measure of managerial optimism based on the linguistic tone of annual reports by applying a Naïve Bayesian Machine Learning algorithm to non-numeric parts of Vietnamese listed firms' reports from 2010 to 2016. The paper employs firm and year fixed effects model and also uses the generalized method of moments estimation as robustness checks.FindingsThe authors find that the cash holding of firms managed by optimistic managers is higher than the cash holdings of firms managed by non-optimistic managers. Managerial optimism also influences corporate cash holdings through internal cash flows and the current year’s capital expenditures. Although the authors find no evidence that optimistic managers hold more cash to finance future growth opportunities in general, optimistic managers hold more cash for near future investment opportunities than non-optimistic managers do.Research limitations/implicationsThe novel measure proposed in this study is expected to provide great potential for future finance studies investigating the relation between managerial traits and corporate policies since it is applicable for any levels of financial market development. In addition, the findings highlight the important role, both direct and indirect, of managerial optimism on cash holdings. Related future research should take this psychological trait into account to gain a better understanding of corporate cash holding.Originality/valueThis paper helps to extend the literature on managerial optimism measurement by introducing a new measure of managerial optimism based on the linguistic tone of annual reports. Furthermore, this is among the first studies directly linking annual report linguistic tone to cash holding. The paper also provides new evidence regarding how managerial optimism affects the relationship between the firm's growth opportunities and cash holding, given that mispricing corrections are naturally uncertain.

show abstract

“…the value the market assigns to an additional dollar of cash holdings), and it is widely used in corporate finance studies (e.g. Aktas et al, 2019;Denis and Sibilkov, 2010;Dittmar and Mahrt-Smith, 2007;Fr esard and Salva, 2010). We augment the baseline model of Faulkender and Wang (2006) with our location variable and its interaction with the change in cash variable to estimate the model specification as follows:…”

Section: Mf 469mentioning

confidence: 99%

Geographical proximity and value of corporate cash holdings

Palkar

Sims

Kuvvet

2020

View full text Add to dashboard Cite

PurposeIn this paper, the authors examine the association between a firm's geographical location and the value of its cash holdings.Design/methodology/approachFollowing Loughran and Schultz (2005) and Nielsson and Wójcik (2016), the authors define firms as either geographically remote or geographically proximate based on their distance to areas that are either largely populated or concentrated in financial expertise. We also estimate the marginal value of cash using the model developed by Faulkender and Wang (2006).FindingsThe authors find that the marginal value of cash is $0.10–$0.16 lower in remotely located firms than in geographically proximate firms. The lower marginal value of cash is prominent among remotely located firms with greater severity of information asymmetry. Our findings support the view that the inability of shareholders to closely monitor how managers use of firm cash may increase the perceived conflicts of interest associated with managers' cash spending and decrease the value of cash.Originality/valuePrevious studies try to explain the cash holdings puzzle by attributing it to CEO overconfidence, external funding constraints, poor corporate governance, difference in corporate financial policy, poor investor protection, lack of firm diversification and large operating losses. This study contributes to the extant literature by offering new evidence of the role of geographic location on the value of cash holdings.

show abstract

CEO overconfidence and the value of corporate cash holdings

Cited by 113 publications

References 62 publications

Overconfident Management and the Audit Fee Demand-Side Perspective

Overconfident Management and the Audit Fee Demand-Side Perspective

Managerial optimism and corporate cash holdings

Geographical proximity and value of corporate cash holdings

Contact Info

Product

Resources

About