| Abstract: | This study examines whether overoptimism and overpessimism of firm’s decision-makers affect company cash-holding decisions. The hypothesis argues that when decision-makers are overoptimistic, they believe that firm can finance capital demands and thus holds less cash. Contrarily, when decision-makers are overpessimistic, they think that firm can not finance capital demands and thus holds more cash. Moreover, the conclusion in the past literature about the relationships between firm’s debt ratio, R&D and capital expenditure ratios, respectively, and cash-holding is mixed. The static trade-off theory suggests that the three variables positively affect the cash-holding, but the pecking order theory and the agency theory argue a negative correlation. This study test again the relationships and further considers the effect of managers’ overoptimism. This study infers that the firms with overoptimistic managers, relative to the firms without overoptimictis managers, have a weaker or stronger relationship between the three variables and cash-holding because they hold less cash and the situation is more significant as the three variables’ levels are higher.
This research uses the panel data on Taiwan’s listing and OTC firms from 1992 to 2013 as a sample. The result from the multiple regression indicates that the firms with overoptimistic managers hold less cash and the firms with overpessimistic managers hold more cash, relative to the firms with moderately optimistic managers. Also, the static trade-off theory is more likely to explain the positive capital expenditure-cash holding relationship, and the relationships between the debt and R&D ratios, respectively, and cash-holding are negative, consistent with the pecking order theory and the agency theory. Finally, only the positive capital expenditure-cash holding relationship is affected negatively by the managerial overoptimism, thus the positive relationship weakens. However, the relationships between the debt ratio and the R&D ratio, respectively, and the cash holding are not influenced by the managerial overoptimism. |
