Impact of product market competition on the overconfidence cash holdings relationship in Chinese firms

Abstract

Traditional Confucian and hierarchical cultures in China often lead managers to become overconfident and hold more cash, which negatively impacts enterprise development. Therefore, in China, the mitigation of excess cash holdings among overconfident managers is worthy of further research. This study examines the effects of manager overconfidence on corporate cash holdings using data from 922 Chinese listed companies and totals 6849 observations. This study is based on a quantitative analysis approach using the Fixed Effects Model and Generalised Method of Moments. The empirical data indicate that manager overconfidence is positively associated with cash holdings. Furthermore, product market competition mitigates the direct correlation between managerial overconfidence and cash holdings. Finally, the impact was particularly noticeable for small and non-state-owned enterprises. This study draws on China's Confucian and hierarchical cultures to explain why overconfident managers tend to hold more cash and offers a different perspective on how product market competition affects the abovementioned relationship. This research enhances the understanding of managerial overconfidence and its economic repercussions and also contributes to the effect of product market competition on the corporate governance of Chinese listed companies.