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Keywords:

  • risk incentives;
  • corporate cash holdings

Abstract:  This paper studies the implications of risk-related agency theory on corporate cash holdings. Cash holdings are less risky but negative NPV projects from the investment perspective. Agency theory predicts that a risk-averse CEO keeps more cash holdings to reduce firm risk at the expense of shareholder value. We use a measure of CEO risk incentives based on executive stock options, and study its relation with corporate cash holdings. We find that firms with higher CEO risk incentives have less cash holdings. We find that the value of cash holdings is higher in firms with higher CEO risk incentives. These findings are consistent with risk-related agency theory.