Evaluation of Managerial Overconfidence, Cash Holding, and Investment Efficiency in Companies

Abstract

Managers’ overconfidence leads to overestimating their ability to manage cash sources. Holding more cash may result in overinvestment in projects and investment inefficiency consequently. The present study aims to investigate the effect of cash holding on investment efficiency with the moderating role of managerial overconfidence in Iranian companies. All listed firms in Tehran Stock Exchange, excluding banks, insurance, pension funds, and financial intermediaries, are included in the research. We have used data from financial statements of 91 companies over the period from 2010 to 2018 and conducted multiple regression models to test the hypotheses based on pooled and panel data set with fixed effects. The results indicate a positive relationship between managerial overconfidence and cash holding. The effect of cash holding on investment efficiency turns out to be significantly negative. Furthermore, managerial overconfidence has a significant moderating effect on the relation of the variables. This study is almost the first one, which has been done in emerging markets, so the study’s findings not only contribute to the existing literature on managerial overconfidence and investment efficiency but also assist policymakers, managers, and investors in making effective decisions.

The impact of managerial attributes on cash holding and investment efficiency and the mediator role of cash holding

“…Among the control variables in equation ( 2), Size and EPS have a positive effect on cash holdings; yet, leverage has a negative effect on cash holdings. The results of Asadia et al (2021) indicated a positive relationship between managerial overconfidence and cash holding. Overconfident managers are more likely to make challenging and risky investments than others (Chen et al, 2020).…”

“…The Durbin-Watson statistics show that there is no serious autocorrelation in the error term. Based on the results of the Wooldridge test, there is autocorrelation in research model and the generalized least squares (GLS) test is used for estimating the coefficients of the model to deal with the issue and also the problem of variance heterogeneity Source: Research findings company value (Wei-Qiu, 2014), while the findings reported by Asadia et al (2021) showed that there is a significant negative relationship between cash holding and investment efficiency. However, managerial myopia has a significant negative effect on investment efficiency (sig < 0.05 and b = À0.014).…”

“…This means that increasing the free cash flow to managers decreases agency costs and leads managers to invest more in projects with positive NPV, which increases investment efficiency. The existing research shows that cash holding can abate financing constraint problems for companies and in turn promote investment efficiency and increase company value (Wei-Qiu, 2014), while the findings reported by Asadia et al (2021) showed that there is a significant negative relationship between cash holding and investment efficiency. However, managerial myopia has a significant negative effect on investment efficiency (sig < 0.05 and β = −0.014).…”

“…Overconfident managers are more likely to make challenging and risky investments than others (Chen et al , 2020). Companies with high levels of management overconfidence are more likely to keep significant amounts of cash available while still making risky investments (Asadia et al , 2021). Therefore, companies with such managers invest more in R&D activities and innovations (Chen et al , 2020).…”