CEO Risk Incentives and Corporate Cash Holdings


  • Zhenxu Tong

    Corresponding author
    1. The author is from the University of Exeter. He would like to thank Andrew Stark (editor), an anonymous referee, and seminar participants at INSEAD and the University of Exeter for their comments and suggestions.
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Address for correspondence: Zhenxu Tong, Xfi Centre for Finance and Investment, University of Exeter, Rennes Drive, Exeter EX4 4ST, UK.


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.