CEO overconfidence and the adjustment speed of leverage and cash: evidence on cash is not the same as negative debt

Overconfident CEOs speed up (slow down) adjusting firm leverage if it is above (below) target leverage. In addition, overconfident CEOs speed up (slow down) adjusting firm cash holdings if it is below (above) the optimal balance. Our results imply overconfident CEOs are associated with high cash holdings and low leverage. Additional tests suggest that the results do not imply cash and (negative) debt are substitutable. We also find overconfident CEOs sometimes reduce firm leverage unexpectedly. The observation is consistent with the view that overconfident CEOs are strong-willed individuals who dislike being monitored. Thus, besides the tendency to overestimate their ability and underestimate risk, overconfident CEOs are affected by additional aspects of their behavioral traits in decision making.