Industry Tournament Incentives and the Product-Market Benefits of Corporate Liquidity

2018 ◽  
Vol 54 (2) ◽  
pp. 829-876 ◽  
Author(s):  
Jian Huang ◽  
Bharat A. Jain ◽  
Omesh Kini
Keyword(s):  
Chief Executive Officer ◽  
Cash Holdings ◽  
Chief Executive ◽  
Product Market ◽  
Capital Expenditures ◽  
Marginal Value ◽  
Corporate Liquidity ◽  
Value Of Cash ◽  
Excess Cash ◽  
Market Benefits

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.

Audit committee members with CEO experience and the value of cash holdings

2020 ◽  
Vol 35 (7) ◽  
pp. 897-926
Author(s):  
Sunhwa Choi ◽  
Jinwoong Han ◽  
Taejin Jung ◽  
Bomi Song
Keyword(s):  
Audit Committee ◽  
Negative Impact ◽  
Cash Holdings ◽  
Chief Executive ◽  
Policy Implications ◽  
Content Type ◽  
Marginal Value ◽  
Value Of Cash ◽  
Negative Effect ◽  
Accounting Expertise

Purpose The purpose of this study is to examine whether the presence of an audit committee (AC) members with Chief Executive Officer (CEO) experience (supervisory experts) affects the market value of cash holdings. Design/methodology/approach To estimate the marginal value of cash holdings, this study uses the model proposed by Faulkender and Wang (2006). The sample is 2,031 firm-year observations in Korea from 2000 through 2015. Findings The authors find that the presence of supervisory experts on ACs has a negative impact on the value of cash holdings. This result suggests that supervisory experts on ACs weaken monitoring of managerial actions. The authors also find that the negative effect of supervisory experts on the value of cash holdings is mitigated when there are other AC members with accounting expertise. Practical implications The findings that AC supervisory expertise impairs the effectiveness of ACs, and thus destroys shareholder value have policy implications because the current regulations in many countries use a broad definition of financial expertise that includes supervisory expertise. Originality/value This is the first study that directly examines the effect of AC supervisory expertise on the value of cash holdings. The study also contributes to the literature on the role of ACs in emerging markets by documenting the limitations of corporate governance systems adopted from the Anglo–Saxon model.

scholarly journals Cash Holdings and CEO Turnover

2016 ◽  
Vol 06 (04) ◽  
pp. 1650022
Author(s):  
Vincent J. Intintoli ◽  
Kathleen M. Kahle
Keyword(s):  
Cash Holdings ◽  
Chief Executive ◽  
Ceo Turnover ◽  
Asset Sales ◽  
Working Capital ◽  
Financial Policies ◽  
Firm Level ◽  
Marginal Value ◽  
Corporate Liquidity ◽  
Ceo Characteristics

Chief Executive Officer (CEO) characteristics, such as the level of risk aversion, are known to affect corporate financial policies, and therefore are likely to impact corporate liquidity decisions. We examine changes in cash holdings around CEO turnover events, a period in which discrete changes in managerial preferences and abilities are likely to have the most dramatic effect on cash holdings. Our results suggest that cash holdings increase significantly following forced departures. The increase is persistent over the successor’s tenure and is robust to controls for the standard firm-level determinants of cash holdings and corporate governance characteristics. We find that higher cash holdings arise mainly through the management of net working capital, as opposed to asset sales or reductions in investment. This suggests that the changes are optimal for shareholders rather than an indication of serious agency problems. This conclusion is supported further by our finding that the marginal value of cash does not decrease following the turnover.

Earnings Quality Effect on Corporate Excess Cash Holdings and Their Marginal Value

2018 ◽  
Vol 54 (4) ◽  
pp. 901-920 ◽  
Author(s):  
Minshik Shin ◽  
Sooeun Kim ◽  
Jongho Shin ◽  
Jaeik Lee
Keyword(s):  
Earnings Quality ◽  
Cash Holdings ◽  
Marginal Value ◽  
Excess Cash

Accounting Restatements and Corporate Cash Policy

2017 ◽  
Vol 35 (2) ◽  
pp. 290-317 ◽  
Author(s):  
Huili Chen ◽  
Zhihong Chen ◽  
Dan S. Dhaliwal ◽  
Yuan Huang
Keyword(s):  
Financial Reporting ◽  
Cash Holdings ◽  
Market Value ◽  
Precautionary Savings ◽  
Difference In Differences ◽  
Accounting Restatements ◽  
Pronounced Increase ◽  
Corporate Decisions ◽  
Value Of Cash ◽  
Excess Cash

Using a difference-in-differences approach, we find that the cash holdings of firms increase significantly after announcements of irregularity-related restatements. The increase is larger for firms with a higher demand for precautionary savings and is smaller for firms with less pronounced increase in shareholder control after the restatements. Investments and repurchases of irregularity firms become more sensitive to excess cash after the restatements. In addition, we find that the market value of cash holdings increases after restatements. Overall, the evidence suggests that strengthened shareholder control reduces cash holdings, but this effect is weaker than the increase in cash holdings due to exacerbated precautionary savings concerns. Our study contributes to the literature on the effect of financial reporting credibility on real corporate decisions.

scholarly journals Excess cash holdings, investment opportunity and shareholder value: European evidences

2016 ◽  
Vol 14 (1) ◽  
pp. 630-639 ◽  
Author(s):  
Simone Terzani ◽  
Giovanni Liberatore
Keyword(s):  
Financial Constraints ◽  
Shareholder Value ◽  
Cash Holdings ◽  
Investment Opportunity ◽  
Ceteris Paribus ◽  
Marginal Value ◽  
Investment Opportunities ◽  
High Investment ◽  
Precautionary Motive ◽  
Excess Cash

In this paper, we examine the marginal value of extra liquidity for a sample of excess cash listed companies (i.e. ECs) operating in the five largest E.U. economies (France, Italy, Germany, Spain and UK). After had shown that these companies are generally penalised by the market, in line with previous literature, we show that extra cash held is not detrimental to shareholder value when it is combined with high investment opportunities leading, hence, in a premium of 1€ extra held. This relation is even stronger during the financial crisis of 2008. These results confirm that the main reason why ECs are generally valued less by the market is the concern that their managers may deploy excess cash in value-destroying activities. However, EC firms are not penalized ceteris paribus when there are investment opportunities. In addition, such relation is stronger with the presence of financial constraints and lack of liquidity, as explained by the transaction and precautionary motive for holding cash.

Over-investment, the marginal value of cash holdings and corporate governance

2015 ◽  
Vol 32 (2) ◽  
pp. 204-221 ◽  
Author(s):  
Chih Jen Huang ◽  
Tsai-Ling Liao ◽  
Yu-Shan Chang
Keyword(s):  
Corporate Governance ◽  
Agency Costs ◽  
Negative Impact ◽  
Cash Holdings ◽  
Firm Level ◽  
Content Type ◽  
Publicly Traded Companies ◽  
Marginal Value ◽  
Value Of Cash ◽  
Cash Reserves

Purpose – The purpose of this paper is to examine how investors’ valuation of cash holdings is related to firm-level investment. Design/methodology/approach – As prior studies note that holding excess cash serve as a driver to would be over-investing, and that over-investment imposes substantial agency costs on shareholders, the authors focus on the value implications of holding cash in the presence of over-investment from the perspective of shareholders. Findings – By examining the publicly traded companies on Taiwan stock market, the authors uncover that cash is valued less in firms with over-investment than in those with under-investment and the magnitude of over-investment is negatively related to the marginal value of cash holdings (MVCH). It reveals that investment activities impact the value that shareholders place on cash holdings. Moreover, further tests indicate that higher block holdings and the presence of independent directors on boards can effectively mitigate the negative impact of over-investment on the MVCH. Practical implications – This paper enhances the understanding of the valuation implications of cash reserves held by firms with over-investment and the effectiveness of governance structures in containing the detrimental effect of investment-related agency costs on the value of holding cash. Originality/value – This paper provides pioneering evidence that outside investors discount cash assets in over-investing firms to reflect their expectations that they will not receive the full benefit of these assets; and this paper extends the literature on corporate governance by assessing the role of governance mechanisms in reversing the negative relation between over-investment and the MVCH.

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