Nikolov is with the Simon School of Business at the University of Rochester. Whited is with the Simon School of Business at the University of Rochester and the NBER. We are grateful for helpful comments from Cam Harvey, an anonymous referee, an Associate Editor, Hui Chen, Laurent Frésard, Arthur Korteweg, Laura Liu, Erwan Morellec, Beau Page, Yuri Tserlukevich, and seminar participants at Lingnan University, City University of Hong Kong, Chinese University of Hong Kong, HKUST, Harvard Business School, Boston University, University of Oklahoma, DePaul University, University of Oregon, Oxford, University of New South Wales, McGill University, University of Texas, Drexel University, Carnegie Mellon University, and University of Washington.
Agency Conflicts and Cash: Estimates from a Dynamic Model
Article first published online: 12 SEP 2014
© 2014 the American Finance Association
The Journal of Finance
Volume 69, Issue 5, pages 1883–1921, October 2014
How to Cite
NIKOLOV, B. and WHITED, T. M. (2014), Agency Conflicts and Cash: Estimates from a Dynamic Model. The Journal of Finance, 69: 1883–1921. doi: 10.1111/jofi.12183
- Issue published online: 12 SEP 2014
- Article first published online: 12 SEP 2014
- Accepted manuscript online: 28 MAY 2014 07:50AM EST
- Manuscript Accepted: 27 FEB 2014
- Manuscript Received: 25 NOV 2011
Which agency problems affect corporate cash policy? To answer this question, we estimate a dynamic model of finance and investment with three mechanisms that misalign managerial and shareholder incentives: limited managerial ownership of the firm, compensation based on firm size, and managerial perquisite consumption. We find that perquisite consumption critically impacts cash policy. Size-based compensation also matters, but less. Firms with lower blockholder and institutional ownership have higher managerial perquisite consumption, low managerial ownership is a key factor in the secular upward trend in cash holdings, and agency plays little role in small firms' substantial cash holdings.