The Research On Managers' Confidence,Internal Control And Corporate Cash Holdings

The theory of traditional corporate finance holds that people are completely rational,but psychological research shows that people are not completely rational,that means when people make their decisions,their beliefs and preferences usually produce systematic biases,which are expressed by behavioral characteristics such as overconfidence,typicality,anchoring and loss avoidance.The theory of behavioral corporate finance is gradually formed as research results on psychology are applied into the field of corporate finance,which relaxes the assumption of rational-economic man.Managers acted as power center of enterprise organizational leadership need to take certain responsibility for business operation and their behaviors can have significant impact on enterprise decisions.Obviously,managers5 behaviors can be affected to some degree by their psychological characteristics,that means managers are not completely rational.Psychological studies believe that overconfidence is pervasive among people and is more obvious among managers and entrepreneurs.In China,the degree of managers' overconfidence is more serious than foreign enterprise because of some problems such as the prominent status of authority in interpersonal relationship,special transition economy environment and imperfection of enterprise internal and external mechanism.So far,studies on the effect of managers'overconfidence on business decisions are mainly about investment and financing decision and M&A decision and rarely involve the decision of corporate cash holdings.Domestic and foreign scholars have been focusing on the decision of corporate cash holdings which is an important financial decision of business and have formed a mature theoretical framework such as pecking order theory,trade-off theory and agency theory.However,existing researches basically think mangers are completely rational and conduct analysis and tests mainly from the views of business characteristics,corporate governance and external environment,less involving the view of manager's confidence.Besides,the influence of managers' behaviors on corporate decisions is connected with the arrangement of corporate institutions and internal control as an important system arrangement of business can effectively supervise and constrain managers' behaviors.So,the main questions that this paper tries to explore:(1)whether and how do managers' confidence affect the decision of corporate cash holdings in Chinese listed companies?(2)whether and how do corporate internal control influence the relationship between managers' confidence and corporate cash holdings decision?Based on the research framework of behavioral finance theory,the paper selects the view of managers' confidence and explore the influence of managers' confidence on the level of corporate cash holdings,the value of corporate cash holding and the speed of dynamic adjustment of corporate cash holdings by using the data of A-share listed companies in Shanghai and Shenzhen Stock Exchanges of China,while examines the effect of internal control as an important institution arrangement between their relationships,thus drawing relevant research conclusions.Based on this,the paper can be divided into seven chapters and structure arrangement is as follows:Chapter one is introduction,including research background,research questions and research meanings,relevant concepts,research ideas and means and research contributions.Chapter two is theoretical basis and literature review.This chapter introduces related theory of motives for corporate to hold cash and overconfidence theory,reviews the existing research in fields of the level of corporate cash holdings,the value of corporate cash holdings and the dynamic adjustment of corporate cash holdings,the measurement and economic results of managers' overconfidence,economic results of internal control and lastly analyses and comments on these researches.Chapter three is analysis of current situation of cash holdings of listed companies.This chapter mainly analyzes the characteristics of listed corporate cash holdings from three perspectives including time,industry and zone and then compare the level of corporate cash holdings between China and some foreign countries.Chapter four and chapter five and chapter six are the main empirical tests.Chapter four firstly empirically tests the impact of managers' confidence on the level of corporate cash holdings;secondly,it tests the moderating effect of internal control acted as system arrangement;then,it further consider the effect of corporate characteristics such as financial constraints and nature of property right on their relationships;besides,it also examines that how managers' confidence affect the way to use excess cash;lastly,it draws the corresponding conclusions.Chapter five firstly empirically tests the impact of managers' confidence on the value of corporate cash holdings;secondly,it tests the moderating effect of internal control;then,it further examines the effect of nature of property right,financial constraints and the growth of enterprise on the relationship between managers' confidence and the value of cash holdings;besides,it also tests the influence of managers' confidence on the value of excess cash;lastly,it puts forward with conclusions.Chapter six firstly empirically tests the impact of managers' confidence on the speed of dynamic adjustment of corporate cash holdings;secondly,it tests the moderating effect of internal control on their relationship.Lastly,it gets conclusions.Chapter seven is research conclusions,suggestions and prospect.This chapter summaries the main research findings,points out the research limitation and discusses the research prospect for the future.Previous studies suggest that managers with high degree of confidence believe that their abilities are above average and they are inclined to overestimate the return and underestimate the risk of project and they think the value of enterprise is underestimated,leading to high external financing cost.Besides,Mangers with high degree of confidence have spirit of adventure.According to these,the paper conducts empirical test and finds that managers' confidence can have significant effect on the decision of corporate cash holdings and corporate internal control can influence their relationships.Specific conclusions are as follow:Firstly,compared with managers with low degree of confidence,managers with high degree of confidence will increase the level of corporate cash holdings,but this kind of positive effect will be reduced with the improvement of business internal control.Considering financial constraints and nature of property right,it suggests that this kind of positive effect is more manifested in these companies with high degree of financial constraints and non-state owned enterprises.Besides,it finds managers with high degree of confidence are more likely to increase future research development when the enterprise has excess cash.Secondly,compared with managers with low degree of confidence,managers with high degree of confidence can enhance the value of corporate cash holdings,and this kind of positive effect can be intensified with the improvement of internal control.Considering financial constraints and enterprise growth,it suggests that this kind of positive effect is more manifested in these companies with low degree of financial constraints and high enterprise growth.Besides,it also finds that the enhancement of the value of corporate cash holdings is more obvious in state-owned enterprises,but the moderating role of internal control mainly exists in non-state owned enterprises.Lastly,the actual level of corporate cash holdings is changing,compared with managers with low degree of confidence,managers with high degree of confidence will accelerate the speed of dynamic adjustment of corporate cash holdings,but good internal control can weaken this effect.The main contributions and innovations of the study are as follows:Firstly,it brings the theory of behavioral finance into the research framework of corporate cash holdings.Domestic and foreign scholars have conducted lots of studies on corporate cash holdings from the perspective of enterprise features and corporate governance and external environment.However,these studies are almost on the basis of assumption of rational economic man and are not completely matched with the reality.The paper takes managerial confidence as the research perspective and empirically tests its effect on corporate cash holdings.The research conclusions obtained will enrich the existing studies of corporate cash holdings,which also provide theory support for explaining the behaviors of corporate cash holdings.Secondly,it extends the research of the economic results of managers'confidence on enterprise decisions to corporate cash holdings.With the development of behavioral finance and research findings of psychology,more and more scholars begin to pay attention to the influence of managers' irrational characteristics on enterprise financial decisions such as investment and financing decisions and M&A decisions and dividend policy,but they neglect the decision of corporate cash holdings.To some degree,the paper makes up for the lack of research in this field by exploring the effect of managers' confidence on the corporate cash holdings.Lastly,it brings enterprise internal control into the research framework of economic results of managers' confidence.Internal control is an important mechanism of ensuring enterprise to function effectively and can have great effect on enterprise behaviors.So,the conclusion drawn will be also helpful for enterprise to copy with the influence of psychological characteristic of managers' confidence on decision-making by testing the the effect of internal control on the relationship between managers' confidence and corporate cash holdings.