Managerial optimism and corporate cash holdings

Abstract

PurposeThis paper examines the effects of managerial optimism on corporate cash holdings.Design/methodology/approachThe authors construct a novel measure of managerial optimism based on the linguistic tone of annual reports by applying a Naïve Bayesian Machine Learning algorithm to non-numeric parts of Vietnamese listed firms' reports from 2010 to 2016. The paper employs firm and year fixed effects model and also uses the generalized method of moments estimation as robustness checks.FindingsThe authors find that the cash holding of firms managed by optimistic managers is higher than the cash holdings of firms managed by non-optimistic managers. Managerial optimism also influences corporate cash holdings through internal cash flows and the current year’s capital expenditures. Although the authors find no evidence that optimistic managers hold more cash to finance future growth opportunities in general, optimistic managers hold more cash for near future investment opportunities than non-optimistic managers do.Research limitations/implicationsThe novel measure proposed in this study is expected to provide great potential for future finance studies investigating the relation between managerial traits and corporate policies since it is applicable for any levels of financial market development. In addition, the findings highlight the important role, both direct and indirect, of managerial optimism on cash holdings. Related future research should take this psychological trait into account to gain a better understanding of corporate cash holding.Originality/valueThis paper helps to extend the literature on managerial optimism measurement by introducing a new measure of managerial optimism based on the linguistic tone of annual reports. Furthermore, this is among the first studies directly linking annual report linguistic tone to cash holding. The paper also provides new evidence regarding how managerial optimism affects the relationship between the firm's growth opportunities and cash holding, given that mispricing corrections are naturally uncertain.

Cash Holding and Firm Value in the Presence of Managerial Optimism

“…According to the overinvestment hypothesis, optimism simply increases cash holding on firm value, because higher cash holding intensifies the overinvestment by investing in value-destroying projects. Tran et al (2020) recently revealed that optimistic managers seek external financing but despite its cost they are adamant that such problems are overcome by value-generating projects. Consistent with these arguments, Malmendier et al (2007) noted that optimists overestimate project cash flows and want to invest more with available adequate cash holding and external finance.…”

“…Optimistic managers are always forecasting positive outcomes and better future performance. They are confident and presume that under their direction all the required work will be accomplished and generate a superior return than the actual return (Tran et al 2020). Optimists are convinced that overestimating the return of well-performed firms is justified and assume that the market undervalues their securities.…”

Corporate Cash Holdings and National Culture: Evidence from the Middle East and North Africa Region

“…However, a recent stream of research is trying to shed light on the impact of managerial characteristics on cash holdings. Tran et al (2021) examined the impacts of managerial optimism on corporate cash holdings. Their study revealed that that firms managed by optimistic managers had higher cash holdings than firms managed by non-optimistic managers.…”

Cash Holding and Firm Value in the Presence of Managerial Optimism

“…Under the overinvestment hypothesis, optimism enhances the negative effect of cash holding on firm value because higher cash holding intensifies the overinvestment by investing in valuedecreasing projects. Further, Tran, Tu, and Hoang (2020) revealed that optimist managers seek external financing is costly and expect it can reduce shortly by value-generating projects. Consistent with these arguments, Malmendier, Tate, and Yan (2007) noted that optimists overestimate the project cash flows and excite to invest more with the availability of adequate cash holding and opportunity to finance externally.…”

“…Optimist managers are always forecasting positive outcomes and expect better future performance. Optimist managers are confident and presume that assignments under their direction are accomplished well in time and generate a superior return than the actual return (Tran, Tu, and Hoang 2020). Optimists are convinced to overestimate the return of wellperformed firms and assume that the market undervalues their securities.…”