Managers’ Overconfidence and Cash Holdings Speed of Adjustment

Abstract

AbstractFirms try to bring their cash holdings ratio closer to the optimal ratio. The adjustment speed of actual cash holdings to achieve the target depends on several factors. In this study, the effect of managers' overconfidence on cash holdings speed of adjustment was investigated. For this purpose, the data of 137 firms during 2004-2020 were gathered and the system GMM controlling the effects of years and industries was utilized. The results showed that the managers’ overconfidence reduced the cash holdings speed of adjustment. The severity of the negative effect of managers' overconfidence on the adjustment speed was less in the firms where more than optimal cash was maintained compared to the other firms. The results of the supplementary tests, which confirmed the main findings of the research were consistent with the facts that the trade-off theory and pecking order theory are interacting in explaining changes in cash holdings speed of adjustment.

Keywords

• managers&rsquo
• overconfidence
• cash holdings speed of adjustment
• trade-off theory
• pecking order theory