Investment Cash Flow Sensitivity under Managerial Optimism: New Evidence from NYSE Firms Panel Data

Mohamed, Ezzeddine Ben; Bouri, Abdelfettah; Fairchild, Richard

doi:10.2139/ssrn.2288702

Cited by 3 publications

(11 citation statements)

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“…Optimist managers overestimate the project under their supervision and underestimate the uncertainty of outcomes. Further, Campello and Hackbarth (2008); Mohamed, Fairchild, and Bouri (2014); Agarwal, Ben-David, and Yao (2015), and Campello and Graham (2013) explained that managerial optimism performs an essential role in determining the long term financing and investment policies of the firms. Mohamed, Fairchild, and Bouri (2014) explained that optimist managers invest more with an adequate amount of internal funds and reluctant to finance externally.…”

Section: Managerial Optimism and Cash Holdingmentioning

confidence: 99%

“…Further, Campello and Hackbarth (2008); Mohamed, Fairchild, and Bouri (2014); Agarwal, Ben-David, and Yao (2015), and Campello and Graham (2013) explained that managerial optimism performs an essential role in determining the long term financing and investment policies of the firms. Mohamed, Fairchild, and Bouri (2014) explained that optimist managers invest more with an adequate amount of internal funds and reluctant to finance externally. Also, Huang-Meier, Lambertides, and Steeley (2016) and Deshmukh, Goel, and Howe (2021) argued that optimistic managers prefer to retain cash for investment by paying a lower dividend to shareholders.…”

Section: Managerial Optimism and Cash Holdingmentioning

confidence: 99%

“…Tobin Q is a more comprehensive proxy of firm value which reflects stock market value divided by total assets. The Q model is an investment model that can also be used to analyze the investment cash flows sensitivity (Han and Qiu 2007;Mohamed, Fairchild, and Bouri 2014;Lin, Hu, and Chen 2005). The independent variable Cash Holding (CH) is the proxy of firm cash and cash equivalent divided by total assets.…”

Section: Variables Explanationmentioning

confidence: 99%

“…In a real situation, this generates agency and asymmetric problems. Mohamed, Fairchild, and Bouri (2014) explain that a firm's cash flow volatility increases in the existence of optimistic managers. Similarly, Mohamed, Garoui, and Naoui (2020) explain that optimist managers are motivated to invest more with internal financing.…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Cash Holding and Firm Value in the Presence of Managerial Optimism

Habib¹,

Bhatti²,

Khan³

et al. 2021

Preprint

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Cash holding is important for Chinese manufacturing firms coping with the increasing cost of financing and stiff market conditions. This study examines the impact of cash holding on the firm value of Chinese manufacturing firms. We find evidence that a non-linear relationship exists between cash holding and firm value in manufacturing firms of China. The study reveals that financially constrained firms having a higher level of cash holding negatively affects the firm value, while the unconstrained firms having a lower level of cash holding positively influences the firm value. Finally, this research is enriched by adopting the novel measure of managerial op-timism and reveals the interactive role of cash holding and optimism on firm value. The study concludes that managerial optimism influences the firm’s cash holding decisions and this is more costly for unconstrained firms.

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Section: Managerial Optimism and Cash Holdingmentioning

confidence: 99%

Section: Managerial Optimism and Cash Holdingmentioning

confidence: 99%

Section: Variables Explanationmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Cash Holding and Firm Value in the Presence of Managerial Optimism

Habib¹,

Bhatti²,

Khan³

et al. 2021

Preprint

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“…Analyses of the effects on firms' outcomes of decisions by excessively optimistic and overconfident CEOs are a recurrent topic in the literature of behavioural corporate finance (for a review, see Malmendier and Tate, 2015). Examples of effects and outcomes include high rates of business failure (Camerer and Lovallo, 1999), share repurchases (Shu et al, 2013) and IPOs (Boulton and Campbell, 2016); biased investment decisions (Malmendier and Tate, 2005a,b) and sensitivity of investment to cash flow (Mohamed et al, 2014); lower dividend payouts (Deshmukh et al, 2013), higher cash holdings (Huang-Meier et al, 2016), and effects on inventory decisions (Lu et al, 2015); earnings smoothing (Bouwman, 2014) and less conservative accounting (Ahmed and Duellman, 2013).…”

Section: Literature On Behavioural Financementioning

confidence: 99%

Fusiones en el sector financiero y crédito excesivo

Peón¹,

Antelo²

2018

REyF

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Se propone un modelo de competencia bancaria que incluye un sesgo de exceso de confianza por parte de algunos gestores. Dos son los principales resultados que se derivan del modelo. Primero, una fusión entre bancos racionales puede cambiar su comportamiento de manera que, tras la fusión, seguirían al banco sesgado en condiciones en las que no lo habrían hecho antes de la fusión, ampliando el volumen de crédito concedido por el mercado bancario. Segundo, los resultados obtenidos resuelven la paradoja de las fusiones, en el sentido de que la fusión sería rentable para los participantes y, por tanto, intrínsecamente estable..

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Are companies managed by overconfident CEO financially constraint? Investment-cash flow sensitivity approach

Wrońska-Bukalska

2020

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Research background: Overconfidence is one of the biases and fallacies that affect a cognitive process. Indeed, overconfidence has some serious consequences even in corporate finance. The literature is not consistent as for the impact of overconfidence on investment and financing decisions. Additionally, we include the issue of financial constraints to our analysis as investment-cash flow sensitivity (ICFS) is perceived as the measure of financial constraints. Purpose of the article: The aim of this paper is to test investment-cash flow sensitivity and financial constraints under managerial overconfidence. We think that companies managed by overconfident managers show a higher relation between cash flows and investment and demonstrate bigger financial constraints. Methods: In this paper, we test investment-cash flow sensitivity and financial constraints under CEO overconfidence among panel data of Polish private firms. We collect the unique sample of 145 non-listed companies by surveying the CEOs on their overconfidence. We collect the financial data of surveyed companies covering the 2010–2016 period. Total number of observations is 1015. Findings & Value added: First, we find a positive and higher relation between the investment-cash flow sensitivity for companies managed by overconfident managers which is in line with recent research. As for the financial constraints we find lower level of financial constraints among the companies managed by overconfident man-agers. This might be evidence that despite having lower financial constraints the companies managed by overconfident managers intentionally choose internal funds as the main source of financing and refrain from using external funds. To the best of our knowledge, this paper is the first empirical study for Polish companies on the relation between CEO overconfidence and financial decisions.

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Investment Cash Flow Sensitivity under Managerial Optimism: New Evidence from NYSE Firms Panel Data

Cited by 3 publications

References 82 publications

Cash Holding and Firm Value in the Presence of Managerial Optimism

Cash Holding and Firm Value in the Presence of Managerial Optimism

Fusiones en el sector financiero y crédito excesivo

Are companies managed by overconfident CEO financially constraint? Investment-cash flow sensitivity approach

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