Agency Conflicts and Cash: Estimates from a Dynamic Model




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    • 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.


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.