Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings

Couzoff, Panagiotis and Banerjee, Shantanu and Pawlina, Grzegorz (2022) Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings. Journal of Corporate Finance. ISSN 0929-1199

[img]
Text (cbp2022_accepted)
cbp2022_accepted.pdf - Accepted Version
Restricted to Repository staff only until 6 February 2024.
Available under License Creative Commons Attribution-NonCommercial-NoDerivs.

Download (1MB)

Abstract

We develop a dynamic model of a firm in which cash management is partially delegated to a self-interested manager. Shareholders trade off the cost of dismissing the manager with the cost of managerial discretion over the use of liquid funds. An improvement in corporate governance quality may have a positive or a negative effect on levels and values of cash balances, depending on the source of the improvement. While a reduction of managerial entrenchment results in lower cash balances and mostly higher marginal cash values, we demonstrate that the opposite is true when the monitoring of managerial actions becomes more effective. A managerial asset substitution problem produces a novel hump-shaped relation between the firm's liquidity levels and the collective propensity of shareholders and managers to reduce cash flow risk. We also discuss the firm's risk management strategies as well as derive implications of the presence of an investment opportunity, debt financing, and shareholder activism.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Corporate Finance
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Corporate Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Corporate Finance, Vol, Pages, Year DOI: 10.1016/j.jcorpfin.2022.102258
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1408
Subjects:
ID Code:
174159
Deposited By:
Deposited On:
04 Aug 2022 08:55
Refereed?:
Yes
Published?:
Published
Last Modified:
17 Aug 2022 15:45