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  • cbp2022_accepted

    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Corporate Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Corporate Finance, Vol, Pages, Year DOI: 10.1016/j.jcorpfin.2022.102258

    Accepted author manuscript, 1.03 MB, PDF document

    Embargo ends: 6/02/24

    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings

Research output: Contribution to Journal/MagazineJournal articlepeer-review

E-pub ahead of print
Article number102258
<mark>Journal publication date</mark>6/08/2022
<mark>Journal</mark>Journal of Corporate Finance
Publication StatusE-pub ahead of print
Early online date6/08/22
<mark>Original language</mark>English

Abstract

We develop a dynamic model of a firm in which cash management is partially delegated to a self-interested manager. Shareholders trade off the cost of dismissing the manager with the cost of managerial discretion over the use of liquid funds. An improvement in corporate governance quality may have a positive or a negative effect on levels and values of cash balances, depending on the source of the improvement. While a reduction of managerial entrenchment results in lower cash balances and mostly higher marginal cash values, we demonstrate that the opposite is true when the monitoring of managerial actions becomes more effective. A managerial asset substitution problem produces a novel hump-shaped relation between the firm's liquidity levels and the collective propensity of shareholders and managers to reduce cash flow risk. We also discuss the firm's risk management strategies as well as derive implications of the presence of an investment opportunity, debt financing, and shareholder activism.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Corporate Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Corporate Finance, Vol, Pages, Year DOI: 10.1016/j.jcorpfin.2022.102258