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CEO overconfidence and the adjustment speed of leverage and cash: evidence on cash is not the same as negative debt

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  • Kenneth Yung

    (Old Dominion University)

  • Xiang Long

    (Hollins University)

Abstract

Overconfident CEOs speed up (slow down) adjusting firm leverage if it is above (below) target leverage. In addition, overconfident CEOs speed up (slow down) adjusting firm cash holdings if it is below (above) the optimal balance. Our results imply overconfident CEOs are associated with high cash holdings and low leverage. Additional tests suggest that the results do not imply cash and (negative) debt are substitutable. We also find overconfident CEOs sometimes reduce firm leverage unexpectedly. The observation is consistent with the view that overconfident CEOs are strong-willed individuals who dislike being monitored. Thus, besides the tendency to overestimate their ability and underestimate risk, overconfident CEOs are affected by additional aspects of their behavioral traits in decision making.

Suggested Citation

  • Kenneth Yung & Xiang Long, 2022. "CEO overconfidence and the adjustment speed of leverage and cash: evidence on cash is not the same as negative debt," Empirical Economics, Springer, vol. 63(2), pages 1081-1108, August.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:2:d:10.1007_s00181-021-02158-5
    DOI: 10.1007/s00181-021-02158-5
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    More about this item

    Keywords

    Target leverage; Target cash; Adjustment speed; CEO overconfidence; Cash and debt substitutability; Cash is not the same as negative debt;
    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
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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