Cash and Corporate Control

Olubunmi Faleye

201 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Corporate Insolvency and Governance Political Influence and Corporate Strategies

Abstract

ABSTRACT The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings. However, recent studies report contradictory evidence. I focus on the takeover‐deterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase, while cash holdings significantly decline.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1996Production, Information Costs and Economic Organization 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1999The determinants and implications of corporate cash holdings 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1988Managerial control of voting rights 1999Corporate Cash Reserves and Acquisitions

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