Managers’ Overconfidence and Corporate Cash Holding in China: The Interaction Effect of Product Market Competition

Abstract

Traditional corporate finance theory holds that people are entirely rational. However, psychological research shows that people are not wholly rational, which means that when people make decisions, their beliefs and preferences usually produce systematic biases manifested by behavioral characteristics such as overconfidence and loss avoidance. Therefore, managers' behaviors can be influenced to some extent by their psychological characteristics, implying that managers are not entirely rational. Thus, the main purpose of this study is to examine the relationship between managers' overconfidence and corporate cash holding decisions in Chinese listed companies. This study also investigated the influence of market product competition on the relationship between managers' overconfidence and corporate cash-holding decisions. This study used the data of the A-share listed companies in Shanghai and Shenzhen Stock Exchange from 2010-2022 as the sample and applied FEM and Generalized Method of Moments (GMM) for analyzing the data. The empirical results show that managers’ overconfidence have the positive correlation with cash holding. Therefore, managers tend to hold more cash for internal financing. However, this positive relationship can be alleviated by product market competition. This study will assist enterprises in developing a comprehensive and effective enterprise cash-holding plan to assist companies in making scientific cash-holding decisions.