This research explores the interaction between CEO optimism and CFO pessimism and its impact on a firm's cash holdings. The core question is whether a team composed of an optimistic CEO and a pessimistic CFO represents the optimal leadership structure for maximizing shareholder value. Existing organizational behavior research suggests that executive teams function like a band, with each member playing a specific role. The CEO leads strategic decision-making, while the CFO manages corporate finance. The interplay between these two roles is crucial for a firm's success. Previous studies have highlighted the positive impact of an entrepreneur's optimistic preference and the tendency for CEOs to be more optimistic and risk-prone than the average person. However, excessive CEO optimism can lead to risky investments. Conversely, a pessimistic CFO offers a counterbalance by providing prudent financial decisions. This study posits that the combination of CEO optimism and CFO pessimism may represent the most effective leadership partnership. Prior work supports this notion by showing a positive correlation between this combination and the success of mergers and acquisitions (M&A). Corporate cash holding is a key financial decision, affecting a firm's risk-bearing and financing capabilities and subsequently its value. Excessive cash holdings can lower returns on funds. While traditional theories like trade-off theory, financing hierarchy theory, and agency theory provide insights into cash holding levels, they often assume manager homogeneity. Upper echelons theory, which suggests that managerial characteristics influence firm behavior, offers a more nuanced perspective. Existing literature on CEO-CFO combinations primarily focuses on external characteristics, while this study investigates the impact of their optimistic/pessimistic traits on cash holdings. The study also considers the contingency effects of situational factors such as firm ownership (state-owned vs. non-state-owned) and regional culture (gambling culture), acknowledging the impact of both formal and informal institutions in China's evolving capital market. The study aims to identify the compound effect of CEO optimism and CFO pessimism on cash holdings and the boundary conditions of that effect, examining the interaction between the CEO's inclination for optimistic risk-taking and the CFO's preference for cautious financial management.

The study reviews existing literature on organizational behavior, upper echelons theory, and corporate cash holding. It highlights the existing research on CEO and CFO characteristics, focusing on their optimism and pessimism, and their impact on financial decision making. The paper notes the existing literature's gap in examining the combined effects of CEO optimism and CFO pessimism, particularly regarding cash holdings. It also acknowledges limitations in the existing literature, pointing to the lack of consideration for the heterogeneity of managerial characteristics and contextual factors such as firm ownership and regional culture. The existing literature on cash holdings is examined, mentioning trade-off, financing hierarchy, and agency theories, and noting their limitations in addressing managerial heterogeneity. The study's review of upper echelons theory establishes the foundation for understanding how managerial traits influence corporate choices. Previous research on CEO-CFO combinations is also considered, with attention to the existing analyses of CEO-CFO external characteristics and their influence on firm finance and financial reporting quality. The authors highlight that while there's research on CEO optimism and CFO overconfidence influencing financial decisions, the combined effect of CEO optimism and CFO pessimism on corporate cash holdings remains unexplored.

The study uses data from non-financial A-share listed firms in China from 2010 to 2018, screening the data to exclude financial firms, firms listed after 2010, and those with missing values. After winsorizing continuous variables at 1% and 99% levels, 386 firms with 3474 observations were used. Data were sourced from the CCER and CSMAR databases. Corporate cash holdings were measured using two ratios: *Cash1* (cash and marketable securities/total assets) and *Cash2* (cash and marketable securities/non-cash assets). CEO optimism was proxied using earnings forecast bias. If the difference between forecasted and actual performance exceeded 10% of actual performance, the CEO was considered optimistic (*Opt*=1). CFO pessimism was measured using a target capital structure model based on Marchica and Mura (2010). The model included industry, size, ROA, cash ratio, growth rate, Tobin's Q, collateral ratio, tax ratio, debt structure, and non-debt tax shield. If the deviation between the actual and target capital structure exceeded 10% of the actual capital structure, the CFO was considered pessimistic (*Pes*=1). Control variables included factors affecting cash holdings (precautionary, speculative, transactional) such as firm size, profitability (ROA), cash flow (CF), growth, complexity, net working capital, managerial shareholding ratio, largest shareholder ownership, board size, board independence, CEO and CFO age and gender, and industry and year dummies. Ordinary Least Squares (OLS) regression was used to test the hypotheses due to the lack of substantial temporal variation in the main variables. The main model was: Cash_i,t = α₀ + α₁Pes_i,t + α₂Opt_i,t + α₃Pes_i,t × Opt_i,t + ΣControls + Industry + Year + u_it. The model was used to test the compound effect of CEO optimism and CFO pessimism on cash holdings. The sample was also divided into subgroups based on regional gambling culture (strong vs. weak) and firm ownership (SOEs vs. non-SOEs) to test contingency effects. Robustness tests included redefining the proxy variables with different thresholds, replacing the dependent variable with excess cash holdings, changing the measurement of regional gambling culture, controlling for financing constraints (using the KZ index), lagging the dependent variables, and employing endogeneity tests (controlling for lagged cash holdings, beta regression, fixed effects model, and instrumental variable method using topographic relief as an instrument).

The study's key findings strongly support the hypothesis that firms with an optimistic CEO and a pessimistic CFO hold significantly less cash. The OLS regression results consistently show a significant negative coefficient for the interaction term (Opt × Pes) across various specifications and robustness checks. Specifically: * **Compound Effect:** The interaction between CEO optimism and CFO pessimism has a significant negative impact on cash holdings, suggesting that this combination leads to lower cash reserves. This effect remains consistent when using either *Cash1* or *Cash2* as the dependent variable. * **Regional Gambling Culture:** The negative compound effect of CEO optimism and CFO pessimism is more pronounced in regions with a strong gambling culture, indicating that risk tolerance moderates this relationship. * **Firm Ownership:** The negative effect is more significant in non-state-owned enterprises (non-SOEs) compared to state-owned enterprises (SOEs). This suggests that government intervention in SOEs may influence cash-holding decisions. * **CFO Board Membership:** The negative compound effect is stronger when the CFO is not on the board of directors, suggesting that the CFO's influence on cash holdings increases when they have a seat on the board. * **Educational Gap:** The negative compound effect is more pronounced when the CEO is less educated than the CFO, emphasizing the CFO's role in financial decision-making. Robustness checks, including redefining proxy variables, changing the dependent variable, using alternative measures for regional gambling culture, controlling for financing constraints, lagging the dependent variable, and addressing endogeneity through various techniques consistently support these core findings. The study also uses visualizations (Figures 3a and 3b) to illustrate the negative relationship between CEO optimism and CFO pessimism, demonstrating the significant effect that the combination of these traits have on a company's cash holdings.

The findings demonstrate a significant negative compound effect of CEO optimism and CFO pessimism on corporate cash holdings. This challenges the conventional wisdom that pessimistic CFOs always lead to higher cash holdings. The results suggest that the optimistic CEO's influence can outweigh the CFO's pessimism when the firm pursues growth strategies. The interaction between CEO optimism and CFO pessimism acts as a check-and-balance mechanism, counteracting the potential over-investment resulting from the CEO's optimism. The stronger effect in regions with a strong gambling culture implies that the level of risk tolerance within the organization significantly impacts the decision to hold less cash. The stronger effect in non-SOEs implies that the relative independence of management from government intervention enables this effect to take full hold. The findings' implications for upper echelons theory lie in demonstrating the importance of considering the interaction between different managerial personalities within the leadership team, rather than focusing solely on individual traits. The results highlight the importance of understanding how different managerial characteristics interplay to drive firm decision-making within specific organizational contexts.

This study provides evidence that firms with optimistic CEOs and pessimistic CFOs tend to hold less cash. This effect is contingent on regional gambling culture, firm ownership, CFO board membership, and the educational difference between the CEO and CFO. The study contributes to upper echelons theory by demonstrating the importance of considering the interplay between managerial characteristics, and it offers new insights into factors influencing corporate cash holdings. Future research should focus on developing more robust measures of CEO optimism and CFO pessimism, exploring additional mechanisms driving this relationship, and conducting cross-national comparisons to enhance the generalizability of findings.

The study's limitations include the reliance on proxies for CEO optimism and CFO pessimism, the potential for omitted variable bias, and the focus on Chinese firms. The use of specific thresholds for defining optimism and pessimism might influence the results, and the chosen proxies may not fully capture the complexity of these traits. The study acknowledges potential endogeneity issues and utilizes several techniques to address this. Further research should consider different methodologies and expand the scope to other countries and cultural contexts to enhance the generalizability of the findings.