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Do CEO beliefs affect corporate cash holdings?

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  • Deshmukh, Sanjay
  • Goel, Anand M.
  • Howe, Keith M.

Abstract

We develop a model of corporate cash holdings that incorporates CEO beliefs. An optimistic CEO views external financing as excessively costly but expects this cost to moderate over time. The optimistic CEO thus delays external financing while funding current investments with existing cash and maintaining a lower cash balance than rational CEOs. We find that, relative to rational CEOs, optimistic CEOs hold 24% less cash, hold lower cash to fund the firms' growth opportunities, and save less cash out of incremental cash flow.

Suggested Citation

  • Deshmukh, Sanjay & Goel, Anand M. & Howe, Keith M., 2021. "Do CEO beliefs affect corporate cash holdings?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:corfin:v:67:y:2021:i:c:s0929119921000067
    DOI: 10.1016/j.jcorpfin.2021.101886
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    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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