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Keywords:

  • Excess cash;
  • Financial constraints;
  • Managerial entrenchment;
  • Overinvestment;
  • Underinvestment
  • G31;
  • G34

Abstract

Our study investigates the relationship between excess cash holdings and investment behaviour under two dimensions of financial constraints and managerial entrenchment, based upon a sample of Taiwanese firms operating in an environment characterized by poor legal protection for investors, with data covering the years 2000–2006. We find that excess cash is significantly correlated with capital expenditure, particularly for firms financially constrained and with severe managerial entrenchment. However, the evidence shows that excess cash is insensitive to R&D expenditure under these two dimensions.