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Tournament-Based Incentives, Corporate Cash Holdings, and the Value of Cash

66 Pages Posted: 22 Apr 2017  

Hieu V. Phan

University of Massachusetts Lowell

Thuy Simpson

Grand Valley State University

Hang T. Nguyen

Michigan State University

Date Written: December 6, 2016

Abstract

This research examines the relationships between tournament-based incentives and corporate cash holdings and the value of cash. We find robust evidence that tournament-based incentives are positively related to cash holdings and the value of cash. Moreover, the effect of tournament-based incentives on the value of cash is stronger for financially constrained firms. Our evidence indicates that, as tournament-based incentives motivate riskier corporate policy choices that lead to not only larger expected shareholder value but also greater cash flow uncertainty, firms increase cash holdings to cushion potential liquidity shortfalls that may cause underinvestment.

Keywords: Tournament-Based Incentives, Risk-Taking, Cash Holdings, Value of Cash

JEL Classification: G30, G32, G34

Suggested Citation

Phan, Hieu V. and Simpson, Thuy and Nguyen, Hang T., Tournament-Based Incentives, Corporate Cash Holdings, and the Value of Cash (December 6, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2956003

Hieu V. Phan (Contact Author)

University of Massachusetts Lowell ( email )

One University Avenue
Lowell, MA 01854
United States

Thuy Simpson

Grand Valley State University ( email )

1 Campus Dr.
Allendale, MI 49401-9403
United States

Hang T. Nguyen

Michigan State University ( email )

East Lansing, MI 48824-1121
United States

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