Agency Conflicts and Cash: Estimates from a Dynamic Model
University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Toni M. Whited
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research
October 11, 2013
Journal of Finance, Forthcoming
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 holding; and agency plays little role in small firms' substantial cash holdings.
Number of Pages in PDF File: 70
Keywords: Cash, agency conflicts, structural estimation
JEL Classification: G32
Date posted: November 19, 2009 ; Last revised: October 16, 2013
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