Discretionary Idiosyncratic Risk, Firm Cash Holdings and Investment

Van Son Lai, Duc Khuong Nguyen, William Sodjahin and Issouf Soumaré

No 2018-008, Working Papers from Department of Research, Ipag Business School

Abstract: We identify a novel concept of discretionary idiosyncratic volatility proxied by the idiosyncratic volatility component not related to the non-systematic industry volatility, as a source of agency problems that have implications for both firms? cash holdings and their investment decisions. We find that firms with low discretionary idiosyncratic volatility, which likely captures discretionary effort and risk-taking by managers, have smaller cash reserves. Moreover, while high discretionary idiosyncratic volatility firms spend cash internally (internal capital building), low discretionary idiosyncratic volatility firms use it for external acquisitions, consistent with the ?quiet life? hypothesis. Our findings thus indicate a need for reinforcement of existing regulations and corporate laws to control for agency costs, which could in turn reduce firm risk and the probability of financial meltdown at the aggregate level.

Keywords: cash holdings; discretionary idiosyncratic volatility; agency problems; investment decisions; ?quiet life? hypothesis (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-01-01
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Citations: View citations in EconPapers (1)

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