title: Cash holdings, shocks, and overconfidence
Creators: name: Yu, Xingyu
Publisher: name: University of Glasgow
Year: 2024

description: This thesis investigates the impacts of cash holdings on firm performance when there are negative shocks, the impacts of compositions of cash holdings on firm performance, and the impacts of overconfident executives on firm performance. Chapter 1 demonstrates the changes in sensitivity of investments to cash holdings during operating cash flow disruptions. Defining operating cash flow disruptions as operation loss, this chapter finds investments sensitivity to cash holdings declines significantly with operation loss. The same pattern of changes is found in investment sensitivities to both optimal cash and excess cash holdings, indicating firms treat the two parts of cash holdings in a similar manner. However, the decline in post-Loss investment-cash holding sensitivity is detected in high-cash firms, financially constrained firms, and poorly governed firms. These firms tend to save large cash holdings initially but deplete them quickly, which leaves insufficient cash holdings for negative shocks. In contrast, low-cash firms, unconstrained firms, and well governed firms experience increase in post-Loss investment-cash holding sensitivity. Low needs for internal liquidity explicate the low level of and less withdrawal from cash reserves, which just increases the availability of cash holdings during negative shocks. Moreover, compared with debt-retiring firms and domestic firms that have larger decreases in post-Loss investment-cash holding sensitivity, firms without debt retirement and multinational firms experience fewer declines for having more cash holdings. Chapter 2 distinguishes the impacts of cash and cash equivalent from short-term investments on firm value. Common measure of cash holdings consists of a cash and cash equivalent component and a short-term investments component. At the mean level, cash and cash equivalent increase firm value more than short-term investments, which translates into a higher value of cash and cash equivalent than the short-term investments. This is because high liquidity of cash and cash equivalent outweighs the reduced liquidity of short-term investments. This effect is more pronounced in firms without recent debt retirement. However, when liquidity is not important, the extra yield of short-term investments dominates the low returns of cash and cash equivalent. Hence the value of short-term investments becomes higher than cash and cash equivalent in firms with lower near-term liquidity needs, less financial constraints, and poorer governance. Chapter 3 shows the impacts of CEO overconfidence on firm stock liquidity. Despite rational CEOs increase stock liquidity through more cash holdings and less investments, this chapter finds the opposite for overconfident CEOs. Firm stock liquidity increases with less fewer holdings and more investments when the firms are managed by overconfident CEOs. Conservatism of rational CEOs reduces the uncertainty over asset-in-place, which makes firm stocks liquid. Yet, in firms with overconfident CEOs, uncertainty decreases when low cash holdings prevent wasteful spending and more investments mitigate underinvestment.