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Excess cash holdings and investment: the moderating roles of financial constraints and managerial entrenchment


  • Her-Jiun Sheu,

    1. Department of Banking and Finance, National Chi Nan University, Nantou County, Taiwan
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  • Shiou-Ying Lee

    1. Institute of Business and Management, National Chiao Tung University, Taipei, Taiwan
    2. Department of Marketing and Logistics Management, Taipei Chengshih University of Science and Technology, Taipei, Taiwan
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  • The authors would like to thank Chih-Liang Liu, Fu-Ru Yang, Tzu-pu Chang and seminar participants at 2010 the 18th Annual Conference on PBFEAM and 2011 European Financial Management Association Annual Meetings in Braga for helpful comments and suggestions.


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.