IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2017-05-60.html
   My bibliography  Save this article

The Impact of Governance Mechanism and Managerial Overconfidence on the Value of Cash Holdings

Author

Listed:
  • Shen-Ho Chang

    (Department of Accounting, Feng Chia University, No. 100, Wenhwa Rd., Seatwen, Taichung, Taiwan 40724, R.O.C.,)

  • Feng-Yi Hsu

    (Feng Chia University, No. 367, Beining Rd., Zhongzheng Dist., Keelung City 202, Taiwan, R.O.C.)

Abstract

This study aims to discuss the overconfident managers and the governance mechanism of the company on the value of cash held by enterprises. According to the empirical findings, the overconfident managers greatly reduces the value of the cash held by the enterprises, while the governance mechanism of the company can effectively weaken the overconfidence of the manager, and thus, significantly increase the value of the cash. An efficient governance mechanism of a company can increase the value of held cash to the level that the cash value is 2.67 times more than the cash held under an inefficient governance mechanism. Therefore, managers with overconfidence should be encouraged to hold more cash in an efficient governance mechanism.

Suggested Citation

  • Shen-Ho Chang & Feng-Yi Hsu, 2017. "The Impact of Governance Mechanism and Managerial Overconfidence on the Value of Cash Holdings," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 517-529.
    • Handle: RePEc:eco:journ1:2017-05-60
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijefi/article/download/5503/pdf
    Download Restriction: no
    File URL: https://www.econjournals.com/index.php/ijefi/article/view/5503/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(4), pages 1547-1584.
    2. Matthew T. Billett & Yiming Qian, 2008. "Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers," Management Science, INFORMS, vol. 54(6), pages 1037-1051, June.
    3. Brickley, James A. & Lease, Ronald C. & Smith, Clifford Jr., 1988. "Ownership structure and voting on antitakeover amendments," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 267-291, January.
    4. Chenchuramaiah T. Bathala & Kenneth P. Moon & Ramesh P. Rao, 1994. "Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective," Financial Management, Financial Management Association, vol. 23(3), Fall.
    5. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    6. Baskin, Jonathan B, 1987. "Corporate Liquidity in Games of Monopoly Power," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 312-319, May.
    7. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    8. Brown, Rayna & Sarma, Neal, 2007. "CEO overconfidence, CEO dominance and corporate acquisitions," Journal of Economics and Business, Elsevier, vol. 59(5), pages 358-379.
    9. Busenitz, Lowell W. & Barney, Jay B., 1997. "Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making," Journal of Business Venturing, Elsevier, vol. 12(1), pages 9-30, January.
    10. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schank Milena - Jana, 2018. "Institutional Ownership and Firm Performance - Evidence from Romania," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 696-701, December.
    2. Crutchley, Claire E. & Jensen, Marlin R. H. & JaheraJr., John S. & Raymond, Jennie E., 1999. "Agency problems and the simultaneity of financial decision making: The role of institutional ownership," International Review of Financial Analysis, Elsevier, vol. 8(2), pages 177-197, June.
    3. Randall S. Kroszner & Philip E. Strahan, 1999. "Bankers on Boards: Monitoring, Conflicts of Interest, and Lender Liability," NBER Working Papers 7319, National Bureau of Economic Research, Inc.
    4. Ghosh, Saibal, 2007. "Leverage, managerial monitoring and firm valuation: A simultaneous equation approach," Research in Economics, Elsevier, vol. 61(2), pages 84-98, June.
    5. Basma Sellami Mezghanni, 2009. "Investissement En R&D Et Performance De L'Entreprise : L'Effet Moderateur De La Gouvernance D'Entreprise," Post-Print halshs-00459415, HAL.
    6. Najah Attig & Sean Cleary & Sadok El Ghoul & Omrane Guedhami, 2013. "Institutional Investment Horizons and the Cost of Equity Capital," Financial Management, Financial Management Association International, vol. 42(2), pages 441-477, June.
    7. Seifert, Bruce & Gonenc, Halit & Wright, Jim, 2005. "The international evidence on performance and equity ownership by insiders, blockholders, and institutions," Journal of Multinational Financial Management, Elsevier, vol. 15(2), pages 171-191, April.
    8. Randall S. Kroszner & Philip E. Strahan, 2001. "Throwing Good Money after Bad? Board Connections and Conflicts in Bank Lending," Center for Financial Institutions Working Papers 02-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Golbe, Devra L. & Nyman, Ingmar, 2013. "How do share repurchases affect ownership concentration?," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 22-40.
    10. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin, 2008. "Insider ownership, ownership concentration and investment performance: An international comparison," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 688-705, December.
    11. Tony Chieh‐Tse Hou, 2019. "The relationship between corporate social responsibility and sustainable financial performance: firm‐level evidence from Taiwan," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 26(1), pages 19-28, January.
    12. Igor Filatotchev & Oksana Dotsenko, 2015. "Shareholder activism in the UK: types of activists, forms of activism, and their impact on a target’s performance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(1), pages 5-24, February.
    13. Attig, Najah & Cleary, Sean & El Ghoul, Sadok & Guedhami, Omrane, 2012. "Institutional investment horizon and investment–cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1164-1180.
    14. Chia-Hsien Tang & Yen-Hsien Lee & Ming-Chih Lee & Ya-Ling Huang, 2020. "CEO Characteristics Enhancing the Impact of CEO Overconfidence on Firm Value After Mergers and Acquisitions — A Case Study in China," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 23(01), pages 1-19, March.
    15. Meles, Antonio & Salerno, Dario, 2020. "Abnormal operating performance in IPOs: Does public float matter?," International Review of Financial Analysis, Elsevier, vol. 71(C).
    16. Gleason, Kim & Johnston, Jarrod & Madura, Jeff, 2007. "Cause and effect of mini-tender offers," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(4), pages 521-534, September.
    17. Diego Cueto & Lorne Switzer, 2015. "Intraday market liquidity, corporate governance, and ownership structure in markets with weak shareholder protection: evidence from Brazil and Chile," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(2), pages 395-419, May.
    18. Aigbe Akhigbe & Jeff Madura & Carolyn Spencer, 2004. "Partial acquisitions, corporate control, and performance," Applied Financial Economics, Taylor & Francis Journals, vol. 14(12), pages 847-857.
    19. Kroszner, Randall S. & Strahan, Philip E., 2001. "Bankers on boards: *1: monitoring, conflicts of interest, and lender liability," Journal of Financial Economics, Elsevier, vol. 62(3), pages 415-452, December.
    20. Georgeta Vintila & tefan Cristian Gherghina, 2015. "Does Ownership Structure Influence Firm Value? An Empirical Research towards the Bucharest Stock Exchange Listed Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 501-514.

    More about this item

    Keywords

    Overconfidence; Cash holdings; Governance mechanism;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2017-05-60. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.