Cash Holdings Adjustment Speed and Managerial Ability

Abstract

Using the partial adjustment model of cash holding, we find that managerial ability is negatively related to adjustment speed of cash holdings toward the target, particularly when the firm has excess cash. We also find that the relation between managerial ability and cash holding adjustment speed is weaker in the presence of the internal capital market. Additionally, we provide evidence that firms with higher managerial ability are less likely to make inefficient investments when they have excess cash, implying that high-ability managers are willing to hold a large amount of cash to make timely investments.

Is Managerial Ability Associated with Capital Structure Adjustment Speed?*

“…Although reaching the optimal capital structure may be one way to increase firm value, managers with better abilities may focus on operational decisions that maximize firm value rather than spend their limited time and efforts on capital structure decisions. Similar to our findings, recent research by Cho et al (2018) reported slower adjustment speeds of cash holdings toward the target level for more competent managers. Both studies cast doubt on the conventional "optimal" level in the partial adjustment models.…”

“…Koester et al (2017) find the positive relation between managerial ability and tax avoidance. Cho et al (2018) present that more competent managers accumulate cash holdings to engage in more efficient investment decisions, resulting in slower cash adjustment speed toward the target.…”

“…Cho et al . (2018) present that more competent managers accumulate cash holdings to engage in more efficient investment decisions, resulting in slower cash adjustment speed toward the target.…”

“…Similar to our findings, recent research by Cho et al . (2018) reported slower adjustment speeds of cash holdings toward the target level for more competent managers. Both studies cast doubt on the conventional “optimal” level in the partial adjustment models.…”

Cash holdings: Do they boost or hurt firms’ performance? Evidence from listed non-financial firms in Saudi Arabia

“…Following the trade-off, pecking order and free cash flow theories [1], a plethora of research focused on the determinants of firms' cash holdings (Al-Najjar, 2013;Ferreira and Vilela, 2004;Guizani, 2017;Opler et al, 1999), the existence of firms' target cash holdings and firms' tendency to adjust toward the optimum target (Cho et al, 2018;Faulkender and Wang, 2006). However, a topic that is still not fully understood is the relationship between firms' cash holdingsespecially levels of cash holdingsand their performance.…”