Agency Conflicts and Cash: Estimates from a Dynamic Model

70 Pages Posted: 19 Nov 2009 Last revised: 16 Oct 2013

Boris Nikolov

University of Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: October 11, 2013

Abstract

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.

Keywords: Cash, agency conflicts, structural estimation

JEL Classification: G32

Suggested Citation

Nikolov, Boris and Whited, Toni M., Agency Conflicts and Cash: Estimates from a Dynamic Model (October 11, 2013). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1508556 or http://dx.doi.org/10.2139/ssrn.1508556

Boris Nikolov

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

University of Lausanne ( email )

Lausanne, CH-1015
Switzerland

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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