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JOURNAL OF APPLIED BUSINESS AND ECONOMICS

Managerial Incentives and Corporate Cash Holdings

Author(s): Tracy Xu, Bo Han

Citation: Tracy Xu, Bo Han, (2013) "Managerial Incentives and Corporate Cash Holdings," Journal of Applied Business and Economics, Vol. 14, Iss. 1, pp. 72-85

Article Type: Research paper

Publisher: North American Business Press

Abstract:

We examine the impact of managerial incentive on firms’ cash holdings policy. We find that firms with

more equity-based compensation have more cash reserves. We also find that managers with equity-based

compensation strongly prefer internal investment through R&D and capital expenditures. Furthermore,

we find that firms with both high cash and high equity-based compensation subsequently experience

higher operating performance. The results suggest that higher cash reserves in firms with higher equitybased

compensation are the result of a decision by managers to provide flexibility to fund profitable

projects, rather than wasting it, which improves firm value through increasing future profitability.