Agency Conflicts and Cash: Estimates from a Dynamic Model

Boris Nikolov and Toni Whited

Journal of Finance, 2014, vol. 69, issue 5, 1883-1921

Abstract: type="main">

Which agency problems affect corporate cash policy? To answer this question, we estimate a dynamic model of finance and investment with three mechanisms that misalign managerial and shareholder incentives: limited managerial ownership of the firm, compensation based on firm size, and managerial perquisite consumption. We find that perquisite consumption critically impacts cash policy. Size-based compensation also matters, but less. Firms with lower blockholder and institutional ownership have higher managerial perquisite consumption, low managerial ownership is a key factor in the secular upward trend in cash holdings, and agency plays little role in small firms' substantial cash holdings.

Date: 2014
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