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| Author: | Liu, Y. Mauer, D.C. |
| Title: | Corporate cash holdings and CEO compensation incentives |
| Journal: | Journal of Financial Economics
2011 : OCT, VOL 102:1 p.183-198 |
| Index terms: | incentives managers compensation risk behaviour liquidity corporate finance corporate governance |
| Freeterms: | cash holdings value of cash |
| Language: | eng |
| Abstract: | We investigate the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to achieve understanding of how compensation incentives designed to improve the consolidation of manager and shareholder interests could cause stockholder-bondholder conflicts. A positive relation is found between CEO risk-taking (vega) incentives and cash holdings, and a negative relation is found between vega and the value of cash to shareholders. The negative vega-cash value relation, robust after controlling for corporate governance, is stronger in high leverage companies. It is reversed for unlevered firms, and non-existing in financially constrained firms. It's also found that the probability of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our findings primarily support the costly contracting hypothesis, which argues bondholders anticipating greater risk-taking in high vega firms and thus require greater liquidity. |
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