# Cash Holding and Firm Value in the Presence of Managerial Optimism

^{1}

^{2}

^{3}

^{4}

^{*}

## Abstract

**:**

## 1. Introduction

## 2. Literature Review

#### 2.1. Cash Holding and Financial Constraints

**Hypothesis**

**1.**

**Hypothesis**

**2.**

**Hypothesis**

**3.**

#### 2.2. Managerial Optimism and Cash Holding

**Hypothesis**

**4.**

**Hypothesis**

**5.**

**Hypothesis**

**6.**

## 3. Data and Methodology

#### 3.1. Data Explanation

#### 3.2. Variables Explanation

#### 3.3. Corporate Governance Variable

#### 3.4. Division of Constrained and Unconstrained Firms

#### 3.5. Internal Forecast and Managerial Optimism

- Panel least squares regression statistics (OLS)$${\mathrm{Tobin}}^{\prime}\mathrm{s}\text{}\mathrm{Q}={\mathsf{\beta}}_{0}+{\mathsf{\beta}}_{1}\left(\mathrm{CH}\right)+{\mathsf{\beta}}_{2}{(\mathrm{CH})}^{2}+{\mathsf{\beta}}_{3}\left(\mathrm{M}.\mathrm{Opt}\right)+{\mathsf{\beta}}_{4}\left(\mathrm{CH}\times \mathrm{M}.\mathrm{Opt}\right)+{\mathsf{\beta}}_{5}\left(\mathrm{LEV}\right)+{\mathsf{\beta}}_{6}\left(\mathrm{FS}\right)+{\mathsf{\beta}}_{7}\left(\mathrm{GRW}\right)+{\mathsf{\beta}}_{8}\left(\mathrm{X}\right)+\mathsf{\mu}.$$
- Panel FE$$\begin{array}{cc}{{\mathrm{Tobin}}^{\prime}\mathrm{s}\text{}\mathrm{Q}}_{\mathrm{i},\mathrm{t}}=& {\mathsf{\beta}}_{0}+{\mathsf{\beta}}_{1}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{2}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}^{2}\right)+{\mathsf{\beta}}_{3}\left(\mathrm{M}.{\mathrm{Opt}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{4}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}\times \mathrm{M}.{\mathrm{Opt}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{5}\left({\mathrm{LEV}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{6}\left({\mathrm{FS}}_{\mathrm{i},\mathrm{t}}\right)\hfill \\ & +{\mathsf{\beta}}_{7}\left({\mathrm{GRW}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{8}\left({\mathrm{X}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\alpha}}_{\mathrm{i}}+{\mathsf{\mu}}_{\mathrm{i},\mathrm{t}}.\hfill \end{array}$$
- GMM$$\begin{array}{cc}{\mathrm{Tobin}}^{\prime}{\mathrm{s}\text{}\mathrm{Q}}_{\mathrm{i},\mathrm{t}}=& {\mathsf{\beta}}_{0}+{\mathsf{\beta}}_{1}\left({{\mathrm{Tobin}}^{\prime}\mathrm{s}\text{}\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}\right)+{\mathsf{\beta}}_{2}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{3}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}^{2}\right)+{\mathsf{\beta}}_{4}\left(\mathrm{M}.{\mathrm{Opt}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{5}\left({\mathrm{CH}}_{\mathrm{i},\mathrm{t}}\times \mathrm{M}.{\mathrm{Opt}}_{\mathrm{i},\mathrm{t}}\right)\hfill \\ & +{\mathsf{\beta}}_{6}\left({\mathrm{LEV}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{7}\left({\mathrm{FS}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{8}\left({\mathrm{GRW}}_{\mathrm{i},\mathrm{t}}\right)+{\mathsf{\beta}}_{9}\left({\mathrm{X}}_{\mathrm{i},\mathrm{t}}\right),\hfill \end{array}$$
- ${{\mathrm{Tobin}}^{\prime}\mathrm{s}\text{}\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}$ is an instrument used to remove endogeneity;
- $\mathsf{\mu}$, and ${\mathsf{\mu}}_{\mathrm{i},\mathrm{t}}$ are standards ${\mathrm{CH}}_{\mathrm{i},\mathrm{t}},\text{}\mathrm{M}.{\mathrm{Opt}}_{\mathrm{i},\mathrm{t}},{\text{}\mathrm{LEV}}_{\mathrm{i},\mathrm{t}},{\text{}\mathrm{FS}}_{\mathrm{i},\mathrm{t}},{\text{}\mathrm{GRW}}_{\mathrm{i},\mathrm{t}},\mathrm{and}{\text{}\mathrm{X}}_{\mathrm{i},\mathrm{t}};$

## 4. Results and Discussion

#### 4.1. Descriptive Statistics

#### 4.2. Pearson Correlation Matrix

#### 4.3. Regression Analysis

^{2}was devised to find the nonlinear relationship between firm value and cash flows. CH

^{2}develops a significant negative relationship with Tobin’s Q in absolutely constrained, relatively constrained, and unconstrained firms in OLS, FE, and GMM, respectively. The negative effect of CH

^{2}on Tobin’s Q reveals that cash flows develop the nonlinear relationship with the firm value, so here hypothesis 1 is supported. The explanatory variable CH (−0.041 in OLS), (−0.040 in FE), and (−0.033 in GMM) significantly negatively influences firm value in the absolutely constrained firms, as proposed in hypothesis 2. The absolutely constrained firms hold more cash and engage in costly external financing. The higher cash holding, the opportunity, and the financing cost of cash holding negatively influence firm value.

## 5. Concluding Remarks

## 6. Managerial Implications

## Author Contributions

## Funding

## Institutional Review Board Statement

## Informed Consent Statement

## Data Availability Statement

## Conflicts of Interest

## References

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Variables | Acronym | Estimation | Multicollinearity | |
---|---|---|---|---|

Tolr | VIF | |||

Firm Value | Tobin Q | Market value of equity + market value of a preferred stock + market value of debt/divided by book value of assets | ||

Managerial Optimism | M.Opt | actual earnings are less than forecast earnings | 0.89 | 1.19 |

Cass Holding | CH | Cash and cash equivalent/total assets | 0.87 | 1.23 |

Leverage | LEV | Long term debt/total assets | 0.75 | 1.34 |

Firm Size | FS | Long term assets/total assets | ||

Sales Growth | SGW | Percentage change in annual sales | ||

CEO Ownership | CEO Own | Total worth of shares held by CEO in a year/total shares outstanding | ||

Independent Director | Indept | Dummy variable 1 for an independent director in a board and 0 otherwise | ||

Director’s Tenure | Tenure | Director’s total time serve in a board | ||

Gender | M/F | Dummy variable 1 for male and 0 for female |

Total Firms | WCR | CHR | DFR | OCFR | RER | DPR |
---|---|---|---|---|---|---|

Absolutely constrained firms | ||||||

≤0 | ≥0 | ≥Avg | ≤0 | ≥Avg | ≤0 | |

244 | 244 | 244 | 244 | 244 | 244 | |

Relatively constrained firms | ||||||

≥0 | ≤0 | ≤Avg | ≤0 | ≥Avg | ≤0 | |

553 | 553 | 553 | 553 | 553 | 553 | |

Unconstrained firms | ||||||

≥0 | ≤0 | ≤Avg | ≥0 | ≤Avg | ≥0 | |

948 | 948 | 948 | 948 | 948 | 948 |

_{(t)}− operating cash flow

_{(t−1)}/sales

_{(t)}; retain earnings rate (RER) = retain earning/sales; dividend payout ratio (DPR) = annual dividend

_{(t)}− annual dividend

_{(t−1)}/net income

_{(t)}.

Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
---|---|---|---|---|---|---|---|---|---|---|---|

Constrained firms | |||||||||||

Total forecasts | 976 | 976 | 976 | 976 | 976 | 976 | 976 | 976 | 976 | 976 | 976 |

Deficit forecasts | 693 | 722 | 745 | 690 | 678 | 736 | 655 | 697 | 733 | 788 | 630 |

Surplus | 283 | 254 | 231 | 286 | 298 | 240 | 321 | 279 | 243 | 188 | 346 |

Relatively constrained firms | |||||||||||

Total forecasts | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 | 2212 |

Deficit forecasts | 1467 | 1523 | 1698 | 1590 | 1478 | 1510 | 1540 | 1440 | 1378 | 1390 | 1540 |

Surplus | 745 | 689 | 514 | 622 | 734 | 702 | 672 | 772 | 834 | 822 | 672 |

Unconstrained firms | |||||||||||

Total forecasts | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 | 3792 |

Deficit forecasts | 2376 | 2460 | 2430 | 2390 | 2580 | 2510 | 2460 | 2375 | 2444 | 2532 | 2454 |

Surplus | 1416 | 1332 | 1362 | 1402 | 1212 | 1282 | 1332 | 1417 | 1348 | 1260 | 1338 |

Variables | Observation | Mean | Median | Maximum | Minimum | Standard Deviation |
---|---|---|---|---|---|---|

Firm data | ||||||

Tobin’s Q | 19,195 | 1.24 | 1.03 | 3.46 | 0.05 | 0.41 |

CH | 19,195 | 0.17 | 0.09 | 0.55 | −0.22 | 0.06 |

M.Opt | 19,195 | 7.78 | 4.00 | 1.00 | 0.00 | 3.24 |

LEV | 19,195 | 0.54 | 0.41 | 0.98 | 0.19 | 0.20 |

FS | 19,195 | 0.73 | 0.55 | 0.94 | 0.53 | 0.29 |

GRW | 19,195 | 0.28 | 0.16 | 0.58 | −0.04 | 0.11 |

Corporate governance data | ||||||

CEO Own | 12,450 | 0.003 | 0.00 | 0.14 | 0.00 | 0.01 |

Indept | 6235 | 3.00 | 1.00 | 6.00 | 0.00 | 0.27 |

Tenure | 19,195 | 3.49 | 2.07 | 11.0 | 0.02 | 0.35 |

Gender | 19,195 | 3.00 | 1.87 | 5.00 | 2.00 | 0.41 |

Variables | Tobin’s Q | CH | M.Opt | LEV | FS | GRW | CEO Own | Indept | Tenure | Gender |
---|---|---|---|---|---|---|---|---|---|---|

Absolutely constrained | ||||||||||

Observations | 2684 | 2684 | 2684 | 2684 | 2684 | 2684 | 1680 | 1070 | 2684 | 2684 |

Mean | 1.07 | 0.24 | 6.52 | 0.79 | 0.81 | 0.18 | 0.002 | 2.53 | 3.03 | 4.00 |

Median | 1.01 | 0.13 | 4.45 | 0.65 | 0.56 | 0.05 | 0.001 | 1.78 | 2.43 | 2.00 |

Maximum | 2.45 | 0.23 | 1.00 | 0.98 | 0.94 | 0.19 | 0.050 | 4.00 | 7.00 | 5.00 |

Minimum | 0.06 | −0.22 | 0.00 | 0.55 | 0.53 | −0.04 | 0.00 | 0.00 | 0.50 | 2.00 |

Relatively constrained | ||||||||||

Observations | 6083 | 6083 | 6083 | 6083 | 6083 | 6083 | 3458 | 1940 | 6083 | 6083 |

Mean | 1.16 | 0.18 | 7.13 | 0.69 | 0.79 | 0.22 | 0.003 | 3.50 | 4.45 | 3.00 |

Median | 1.04 | 0.08 | 4.67 | 0.54 | 0.58 | 0.06 | 0.001 | 2.00 | 3.09 | 2.00 |

Maximum | 3.15 | 0.32 | 1.00 | 0.86 | 0.87 | 0.32 | 0.000 | 6.00 | 7.00 | 4.00 |

Minimum | 0.08 | −0.15 | 0.00 | 0.51 | 0.57 | 0.02 | 0.060 | 0.01 | 1.30 | 1.00 |

Unconstrained | ||||||||||

Observations | 10,428 | 10,428 | 10,428 | 10,428 | 10,428 | 10,428 | 7332 | 3225 | 10,428 | 10,428 |

Mean | 1.23 | 0.15 | 8.33 | 0.48 | 0.73 | 0.33 | 0.005 | 3.69 | 3.76 | 3.45 |

Median | 1.10 | 0.09 | 5.81 | 0.39 | 0.61 | 0.21 | 0.003 | 2.78 | 3.00 | 2.98 |

Maximum | 3.46 | 0.55 | 1.00 | 0.65 | 0.81 | 0.58 | 0.14 | 6.00 | 11.0 | 5.00 |

Minimum | 0.05 | 0.03 | 0.00 | 0.20 | 0.58 | 0.10 | 0.00 | 1.00 | 1.00 | 0.03 |

**Table 6.**Correlation matrix of the financially absolutely constrained and relatively constrained firms.

^{a}= significant at 0.01;

^{b}= significant at 0.05;

^{c}= significant at 0.10.

Variables | Tobin’s Q | CH | M.Opt | LEV | FS | GRW | CEO Own | Indept | Tenure | Gender |
---|---|---|---|---|---|---|---|---|---|---|

Tobin’s Q | 1 | |||||||||

CH | 0.45 ^{a} | 1 | ||||||||

M.Opt | −0.18 ^{a} | −0.21 ^{a} | 1 | |||||||

LEV | 0.33 ^{a} | 0.15 ^{a} | 0.13 ^{a} | 1 | ||||||

FS | 0.26 ^{a} | 0.22 ^{a} | 0.17 ^{a} | 0.23 ^{a} | 1 | |||||

GRW | 0.29 ^{a} | 0.15 ^{a} | 0.09 ^{b} | 0.15 ^{a} | 0.18 ^{a} | 1 | ||||

CEO Own | 0.14 ^{a} | 0.16 ^{b} | 0.14 ^{a} | 0.14 ^{a} | 0.11 ^{a} | 0.14 ^{b} | 1 | |||

Indept | 0.16 ^{a} | 0.14 ^{a} | 0.04 ^{a} | 0.13 ^{b} | 0.11 ^{c} | 0.15 ^{c} | 0.09 ^{b} | 1 | ||

Tenure | 0.22 ^{b} | 0.15 ^{b} | 0.12 ^{c} | 0.16 ^{b} | 0.14 ^{b} | 0.13 ^{b} | 0.09 ^{b} | 0.11 ^{b} | 1 | |

Gender | 0.12 ^{a} | 0.10 ^{a} | 0.07 ^{c} | 0.05 ^{c} | 0.09 ^{c} | 0.08 ^{c} | 0.11 ^{c} | 0.08 ^{c} | 0.12 ^{c} | 1 |

^{a}= significant at 0.01;

^{b}= significant at 0.05;

^{c}= significant at 0.10.

Dep Variable Absolutely Constrained Firms | Relatively Constrained Firms | Unconstrained Firms | |||||||
---|---|---|---|---|---|---|---|---|---|

Tobin’s Q | OLS | FE | GMM | OLS | FE | GMM | OLS | FE | GMM |

Tobin’s Q(−1) | 0.001 ^{a} | 0.003 ^{a} | 0.001 ^{a} | ||||||

CH | −0.041 ^{a} | −0.040 ^{a} | −0.033 ^{a} | 0.034 ^{a} | 0.030 ^{a} | 0.028 ^{a} | 0.043 ^{a} | 0.034 ^{a} | 0.031 ^{a} |

CH^{2} | −0.041 ^{a} | −0.032 ^{a} | −0.031 ^{a} | −0.043 ^{a} | −0.041 ^{a} | −0.039 ^{a} | −0.038 ^{a} | −0.037 ^{a} | −0.029 ^{a} |

LEV | −0.023 ^{a} | −0.018 ^{a} | −0.017 ^{a} | 0.021 ^{a} | 0.020 ^{a} | 0.020 ^{a} | 0.041 ^{a} | 0.038 ^{a} | 0.031 ^{a} |

FS | 0.031 ^{a} | 0.028 ^{a} | 0.022 ^{a} | 0.027 ^{a} | 0.023 ^{a} | 0.018 ^{b} | 0.034 ^{a} | 0.029 ^{a} | 0.021 ^{b} |

GRW | 0.067 ^{a} | 0.065 ^{a} | 0.051 ^{a} | 0.071 ^{a} | 0.067 ^{a} | 0.051 ^{a} | 0.066 ^{a} | 0.061 ^{a} | 0.051 ^{a} |

CEO Own | 0.003 ^{a} | 0.003 ^{a} | 0.001 ^{a} | 0.005 ^{a} | 0.003 ^{b} | 0.002 ^{b} | 0.004 ^{a} | 0.003 ^{b} | 0.001 ^{c} |

Indept | 0.006 ^{b} | 0.005 ^{b} | 0.003 ^{b} | 0.004 ^{b} | 0.004 ^{b} | 0.002 ^{c} | 0.005 ^{a} | 0.003 ^{c} | 0.002 ^{c} |

Tenure | 0.004 ^{a} | 0.004 ^{b} | 0.001 ^{c} | 0.003 ^{a} | 0.002 ^{b} | 0.002 ^{c} | 0.005 ^{a} | 0.004 ^{a} | 0.001 ^{b} |

Gender | 0.003 ^{a} | 0.002 ^{a} | 0.001 ^{b} | 0.004 ^{a} | 0.003 ^{b} | 0.003 ^{b} | 0.002 ^{a} | 0.002 ^{b} | 0.001 ^{c} |

R-Square | 0.32 | 0.27 | 0.29 | 0.23 | 0.33 | 0.28 | |||

Arelano Bond | −2.291 ^{a} | −2.224 ^{a} | −2.238 ^{a} | ||||||

1st Order | −0.636 ^{a} | −0.987 ^{a} | 0.658 ^{a} |

^{a}= significant at 0.01;

^{b}= significant at 0.05;

^{c}= significant at 0.10.

Dep Variable Absolutely Constrained Firms | Relatively Constrained Firms | Unconstrained Firms | |||||||
---|---|---|---|---|---|---|---|---|---|

Tobin’s Q | OLS | FE | Tobin.Q | OLS | FE | Tobin.Q | OLS | FE | Tobin.Q |

Tobin’s Q(−1) | 0.003 ^{a} | 0.002 ^{a} | 0.001 ^{a} | ||||||

CH | 0.058 ^{a} | 0.050 ^{a} | 0.047 ^{a} | 0.051 ^{a} | 0.049 ^{a} | 0.043 ^{a} | −0.039 ^{a} | −0.037 ^{a} | −0.034 ^{a} |

M.Opt | 0.041 ^{a} | 0.032 ^{a} | 0.031 ^{a} | 0.040 ^{a} | 0.039 ^{a} | 0.034 ^{a} | −0.031 ^{a} | −0.030 ^{a} | −0.029 ^{a} |

CH × M.Opt | 0.072 ^{a} | 0.069 ^{a} | 0.065 ^{a} | 0.064 ^{a} | 0.054 ^{a} | 0.052 ^{a} | −0.043 ^{a} | −0.041 ^{a} | −0.036 ^{a} |

LEV | 0.024 ^{a} | 0.022 ^{a} | 0.019 ^{a} | 0.052 ^{a} | 0.046 ^{a} | 0.037 ^{a} | −0.040 ^{a} | −0.037 ^{a} | −0.033 ^{a} |

FS | 0.032 ^{a} | 0.028 ^{a} | 0.023 ^{a} | 0.028^{a} | 0.024 ^{a} | 0.022 ^{a} | 0.033^{a} | 0.031 ^{a} | 0.027 ^{a} |

GRW | 0.059 ^{a} | 0.055 ^{a} | 0.052 ^{a} | 0.069 ^{a} | 0.063 ^{a} | 0.054 ^{a} | 0.063 ^{a} | 0.060 ^{a} | 0.056 ^{a} |

CEO Own | 0.002 ^{a} | 0.001 ^{a} | 0.001 ^{a} | 0.004 ^{a} | 0.003 ^{b} | 0.003 ^{b} | −0.004 ^{a} | −0.002 ^{b} | −0.001 ^{c} |

Indept | 0.006 ^{b} | 0.005 ^{b} | 0.003 ^{b} | 0.003 ^{b} | 0.002 ^{b} | 0.002 ^{c} | 0.005 ^{a} | 0.003 ^{c} | 0.002 ^{c} |

Tenure | 0.004 ^{a} | 0.004 ^{b} | 0.001 ^{c} | 0.003 ^{a} | 0.002 ^{b} | 0.002 ^{c} | 0.005 ^{a} | 0.004 ^{a} | 0.001 ^{b} |

Gender | 0.003 ^{a} | 0.002 ^{a} | 0.001 ^{b} | 0.004 ^{a} | 0.003 ^{b} | 0.003 ^{b} | 0.002 ^{a} | 0.002 ^{b} | 0.001 ^{c} |

R−Square | 0.29 | 0.025 | 0.31 | 0.28 | 0.33 | 0.27 | |||

Arelano Bond | −0.231 ^{a} | ||||||||

1st Order | −0.253 ^{a} | −0.987 ^{a} | |||||||

2nd Order | 0.595 ^{a} | 0.584 ^{a} | 0.786 ^{a} |

^{a}= significant at 0.01;

^{b}= significant at 0.05;

^{c}= significant at 0.10.

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## Share and Cite

**MDPI and ACS Style**

Habib, A.; Bhatti, M.I.; Khan, M.A.; Azam, Z.
Cash Holding and Firm Value in the Presence of Managerial Optimism. *J. Risk Financial Manag.* **2021**, *14*, 356.
https://doi.org/10.3390/jrfm14080356

**AMA Style**

Habib A, Bhatti MI, Khan MA, Azam Z.
Cash Holding and Firm Value in the Presence of Managerial Optimism. *Journal of Risk and Financial Management*. 2021; 14(8):356.
https://doi.org/10.3390/jrfm14080356

**Chicago/Turabian Style**

Habib, Ashfaq, M. Ishaq Bhatti, Muhammad Asif Khan, and Zafar Azam.
2021. "Cash Holding and Firm Value in the Presence of Managerial Optimism" *Journal of Risk and Financial Management* 14, no. 8: 356.
https://doi.org/10.3390/jrfm14080356