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Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings

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Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings. / Couzoff, Panagiotis; Banerjee, Shantanu; Pawlina, Grzegorz.
In: Journal of Corporate Finance, Vol. 77, 102258, 31.12.2022.

Research output: Contribution to Journal/MagazineJournal articlepeer-review

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Couzoff P, Banerjee S, Pawlina G. Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings. Journal of Corporate Finance. 2022 Dec 31;77:102258. Epub 2022 Aug 6.

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Bibtex

@article{237000bce2e04bdbba1a6dba21ab7171,
title = "Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings",
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.",
keywords = "Corporate governance, Cash management, Payout policy, Risk management, Agency problem",
author = "Panagiotis Couzoff and Shantanu Banerjee and Grzegorz Pawlina",
year = "2022",
month = dec,
day = "31",
language = "English",
volume = "77",
journal = "Journal of Corporate Finance",
issn = "0929-1199",
publisher = "Elsevier",

}

RIS

TY - JOUR

T1 - Effectiveness of Monitoring, Managerial Entrenchment, and Corporate Cash Holdings

AU - Couzoff, Panagiotis

AU - Banerjee, Shantanu

AU - Pawlina, Grzegorz

PY - 2022/12/31

Y1 - 2022/12/31

N2 - 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.

AB - 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.

KW - Corporate governance

KW - Cash management

KW - Payout policy

KW - Risk management

KW - Agency problem

M3 - Journal article

VL - 77

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

SN - 0929-1199

M1 - 102258

ER -