Managerial optimism and corporate cash holdings
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 4 June 2020
Issue publication date: 8 March 2021
Abstract
Purpose
This paper examines the effects of managerial optimism on corporate cash holdings.
Design/methodology/approach
The 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.
Findings
The 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/implications
The 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/value
This 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.
Keywords
Acknowledgements
The authors would like to thank the participants in Vietnam’s Business & Economics Research Conference 2018 for their helpful comments. The authors also want to thank the master students at School of Finance for their manual coding support.Funding: This research is funded by Vietnam National Foundation for Science and Technology Development (NAFOSTED) [under grant number 502.02-2016.06].
Citation
Tran, L.T.H., Tu, T.T.K. and Hoang, T.T.P. (2021), "Managerial optimism and corporate cash holdings", International Journal of Managerial Finance, Vol. 17 No. 2, pp. 214-236. https://doi.org/10.1108/IJMF-04-2019-0129
Publisher
:Emerald Publishing Limited
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