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Corporate Cash Holdings and CEO Compensation Incentives

Yixin Liu

University of New Hampshire

David C. Mauer

University of Iowa

October 25, 2010

We examine the effect of CEO compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance the alignment of manager and shareholder interests may influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and therefore require greater liquidity.

Number of Pages in PDF File: 39

Keywords: Cash Holdings, Value of Cash, Managerial Incentives

JEL Classification: G30, G32, G34

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Date posted: October 24, 2009 ; Last revised: December 16, 2010

Suggested Citation

Liu, Yixin and Mauer, David C., Corporate Cash Holdings and CEO Compensation Incentives (October 25, 2010). Available at SSRN: http://ssrn.com/abstract=1492468 or http://dx.doi.org/10.2139/ssrn.1492468

Contact Information

Yixin Liu
University of New Hampshire ( email )
Durham, NH 03824
United States
603-862-3357 (Phone)
David C. Mauer (Contact Author)
University of Iowa ( email )
Iowa City, IA 52242-1000
United States
319-335-0944 (Phone)
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References:  38
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