Abstract
We study the effects of managerial overconfidence and agency costs on cash holdings of blockchain firms, where the overconfidence is defined as a cognitive bias that a manager will underestimate volatility in an uncertain environment. We develop a real-options game model that incorporates both overconfidence and agency costs. The theoretical results show that future investment opportunities are necessary for holding cash when agency costs are within the firm. Expected returns from blockchain projects decrease with managerial overconfidence. The level of corporate cash holdings increases with overconfidence and decreases with agency costs. Using the data of Chinese listed firms from 2010 to 2019, we find that the regression results are consistent with our theoretical findings. Moreover, we find that the blockchain firms’ cash holdings are higher than their peers. Our results shed some light on the impacts of behavioral characteristics on cash holdings.
Highlights
T HE decision of cash holdings is a key financing strategy in corporate finance, especially when firms are involved in blockchain projects
This study investigates the impacts of managerial overconfidence and agency costs on cash holdings within blockchain firms
We find that the optimal level of cash holdings for firms that invest in blockchain projects increases with managerial overconfidence and decreases with agency costs
Summary
T HE decision of cash holdings is a key financing strategy in corporate finance, especially when firms are involved in blockchain projects. This study investigates the impacts of managerial overconfidence and agency costs on cash holdings within blockchain firms. If there are possible investment opportunities within the framework of agency costs in power function form, the optimal cash retention ratio for the shareholder’s decision makes the evolution of the cash holdings the level subject to a geometric Brownian motion. We find that the optimal level of cash holdings for firms that invest in blockchain projects increases with managerial overconfidence and decreases with agency costs. Our regression results are generally consistent with the theoretical analysis These findings contribute to the literature investigating the determinants of cash holdings for one behavioral characteristic prevalent among managers [30].
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