The importance of managerial discretion on managerial ability–firm cash holding nexus

Abstract

PurposeThis paper examines the role of managerial discretion in the relation between managerial ability on the level of corporate cash.Design/methodology/approachConjoining the upper echelons theory's premises and the theoretical framework of cash holdings, we posit that the managerial ability's effect on cash policy varies with managerial discretion using firm-level data. To test the empirical prediction, we employ a linear regression model with fixed effects with a sample of US listed firms from 1980 to 2016.FindingsThe findings reveal that the positive association between the ability of chief executive officers and corporate cash savings is weakened by firm-level managerial discretion. The results are robust to various additional analyses, namely lagged independent variables regression, reduced form regression and granger causality test. Overall, the findings are generally consistent with the cash holding motives yielding transaction and precautionary demand for money. However, our findings also shed light on whether managerial discretion moderates or exacerbates agency problems related to top executives' cash holding policies.Originality/valueThis work's distinct characteristic is the investigation of the joint effect of managerial talent and discretion on a firm's cash holding, which remains unexplored in the literature.

Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?

“…Jebran and Chen (2022) report high ability managers are associated with reduced cash holdings in China. However, Magerakis (2022) find that highability managers are associated with high cash holdings in US This suggests that prior studies have mixed findings on the role of highly able managers in cash holdings. The precautionary motive argues that firm policy is to hold more cash to counter uncertainties or constraints that the business may face due to competition and future projects (Han and Qiu, 2007).…”

“…A study by Matemilola et al (2018) indicates that experienced and capable managers leverage greater debt to protect the firm's profits from taxation, enhancing debt capital. The review of recent studies investigating managerial ability have focused majorly for developed (Kumar and Zbib, 2022;Khoo and Cheung, 2022;Magerakis, 2022;Haider et al, 2021;Curi and Lozano-Vivas, 2020) or Asian economies (Jebran and Chen, 2022;Phan, 2021;Naheed et al, 2021). Some studies have shown higher ability managers are associated with short-term debt (Khoo and Cheung, 2022;Shang, 2021).…”

Tax planning and financial default: role of corporate life cycle

“…Existing research suggests that the influence of slack resources on performance or innovation depends on several factors, including the industry (Daniel et al. , 2004), type of firm (public or private; George, 2005), type of slack (absorbed or unabsorbed; Lee and Wu, 2016) and the degree of managerial discretion (Magerakis, 2022). Nohria and Gulati (1996) demonstrated that both excessive or insufficient slack resources can hinder innovation.…”

“…and the degree of managerial discretion (Magerakis, 2022). Nohria and Gulati (1996) demonstrated that both excessive or insufficient slack resources can hinder innovation.…”

“…Our findings show that cash resources from tax planning are managed and allocated in distinctive ways across life cycle stages, thereby having a varied impact on the default likelihood. Moreover, while most prior studies focus on valuable, rare, inimitable and organizationally embedded (VRIO) resources, we contribute to the literature on less explored cash resources (Warnier et al, 2013;Magerakis, 2022).…”