CEO entrenchment and corporate liquidity management

Corporate cash holdings: Causes and consequences

“…Part of this relationship could be explained by CEO entrenchment. Elyasiani and Zhang (2015) find that entrenched CEOs prefer liquid assets because it reduces firms' risks, which in turn provides managers with job security, but it also provides the resources to pursue objectives that deliver private benefit. It might be that very high levels of management ownership are associated with lower cash holdings because managers bear a greater share of the cost for each unit of cash that is misused.…”

Investor protection, managerial entrenchment, and cash holdings: Cross‐country evidence

“…Managers prefer to hold more cash because it makes investing easier, it facilitates overpayment in acquisitions, and it increases their overall discretion (Dittmar et al, ; Jensen, ; Opler et al, ; Ozkan & Ozkan, ). In addition, investing internal cash diminishes creditor monitoring and external pressure from shareholders to perform (Elyasiani & Zhang, ; Opler et al, ). However, for shareholders the only benefit of holding cash is the lower probability of cutting profitable investments and/or dividends in the future.…”

“…Creditors have mixed preferences over cash holdings. Cash lowers default risk (Elyasiani & Zhang, ) and can be entirely reclaimed in bankruptcy. However, Myers and Rajan (, p. 734) argue that tangible assets, such as cash, increase ‘the odds that the assets will “be there”’, which increases creditors’ probability of recovering their wealth.…”

“…However, for shareholders the only benefit of holding cash is the lower probability of cutting profitable investments and/or dividends in the future. From the shareholder perspective, cash earns virtually zero return (Dittmar et al, 2003;Elyasiani & Zhang, 2015), is easily expropriated by managers (Myers & Rajan, 1998), encourages inefficient investment decisions (Easterbrook, 1984;Jensen, 1986), and is harder to monitor (Elyasiani & Zhang, 2015;Frésard & Salva, 2010). Creditors have mixed preferences over cash holdings.…”

“…Studies on managers' cash preferences suggest that they prefer higher levels of cash than shareholders (Dittmar et al, 2003;Ozkan & Ozkan, 2004) and that entrenched managers are reluctant to disburse excess cash (Elyasiani & Zhang, 2015;Jiang & Lie, 2016). From the entrenched manager's perspective, cash decreases the risk of bankruptcy, which decreases the probability of creditors intervening in the firm (Elyasiani & Zhang, 2015;Opler et al, 1999), and increases flexibility and MARTINS | 3 2 | discretion over firm investment policies, facilitating overinvestment (Dittmar et al, 2003;Easterbrook, 1984;Jensen, 1986).…”