CEO managerial ability and the marginal value of cash
Huiqi Gan and
Myung S. Park
Advances in accounting, 2017, vol. 38, issue C, 126-135
This study examines whether the managerial ability of a chief executive officer (CEO) is associated with a marginal value of cash. We predict that more talented CEOs make better use of cash, creating the marginal value of cash. Using the managerial ability measures of Demerjian et al. (2012) and the cash value model developed by Faulkender and Wang (2006), we find that CEO managerial ability significantly increases the marginal value of cash. We also find that the effect of managerial ability on the marginal value of cash is generally greater for financially constrained firms. We further show that that the positive impact of managerial ability on the marginal value of cash is more evident for firms with higher levels of free cash flows and lower management entrenchment. Overall, our findings suggest that the market places a higher value on cash if the cash is managed by more able CEOs, which is consistent with the view that shareholders consider the ability of a CEO when they evaluate cash.
Keywords: Managerial ability; Value of cash; Cash; Free cash flow; Leverage (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:38:y:2017:i:c:p:126-135
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