Agency Conflicts and Cash: Estimates from a Dynamic Model

70 Pages Posted: 19 Nov 2009 Last revised: 19 Nov 2017

See all articles by Boris Nikolov

Boris Nikolov

University of Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Toni M. Whited

University of Michigan, Department of Economics; 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

University of Lausanne ( email )

Lausanne, CH-1015
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Toni M. Whited (Contact Author)

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States