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Motives for corporate cash holdings: the CEO optimism effect

Author

Listed:
  • Winifred Huang-Meier

    (Aston University)

  • Neophytos Lambertides

    (Cyprus University of Technology)

  • James M. Steeley

    (Aston University)

Abstract

We examine the chief executive officer (CEO) optimism effect on managerial motives for cash holdings and find that optimistic and non-optimistic managers have significantly dissimilar purposes for holding more cash. This is consistent with both theory and evidence that optimistic managers are reluctant to use external funds. Optimistic managers hoard cash for growth opportunities, use relatively more cash for capital expenditure and acquisitions, and save more cash in adverse conditions. By contrast, they hold fewer inventories and receivables and their precautionary demand for cash holdings is less than that of non-optimistic managers. In addition, we consider debt conservatism in our model and find no evidence that optimistic managers’ cash hoarding is related to their preference to use debt conservatively. We also document that optimistic managers hold more cash in bad times than non-optimistic managers do. Our work highlights the crucial role that CEO characteristics play in shaping corporate cash holding policy.

Suggested Citation

  • Winifred Huang-Meier & Neophytos Lambertides & James M. Steeley, 2016. "Motives for corporate cash holdings: the CEO optimism effect," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 699-732, October.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:3:d:10.1007_s11156-015-0517-1
    DOI: 10.1007/s11156-015-0517-1
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    More about this item

    Keywords

    Cash holdings; Liquidity; Cash holdings motive; CEO optimism;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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