Is Cash More Valuable in the Hands of Overconfident CEOs

Frankfurt am Main

Partner event in cooperation with “Arbeitskreis Finanzierung der Professorinnen und Professoren an Hochschulen für Angewandte Wissenschaften“

Nihat Aktas and his co-authors investigate whether and how CEO overconfidence affects the value of cash. They find that cash is more valuable when firms are managed by overconfident CEOs. Economically, having an overconfident CEO on board increases the value of $1.00 cash holding by an additional amount of $0.49. This effect concentrates among firms that exhibit risky growth opportunities and are financially constrained or have high hedging needs. Additional analysis shows that cash holdings allow overconfident CEOs to increase future market share relative to industry rivals. Overall, their findings suggest that cash enables overconfident CEOs to exploit risky growth opportunities and improve product market performance.