Premium
Agency Conflicts and Cash: Estimates from a Dynamic Model
Author(s) -
NIKOLOV BORIS,
WHITED TONI M.
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12183
Subject(s) - incentive , consumption (sociology) , cash , agency (philosophy) , investment (military) , shareholder , agency cost , business , economics , finance , monetary economics , accounting , corporate governance , microeconomics , social science , philosophy , epistemology , sociology , politics , political science , law
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.