Precautionary motive or private benefit motive for holding cash: Evidence from CEO ownership

Abstract

This paper examines how CEO ownership affects the motivation of firms to hold cash. We document a monotonic and positive relation between CEO ownership and cash holdings. We also find that CEO ownership has a stronger impact on cash holdings when firms have higher firm-specific risk and larger external financing costs. However, we do not find evidence that CEO ownership induces firms with weak corporate governance to stockpile cash. Moreover, firms with high CEO ownership and excess cash holdings have more capital expenditures and R\&D expenses, but do not have higher dividend payments and share repurchases. Meanwhile, shareholders' perceived value of cash increases with CEO ownership, which further asserts the view that firm ownership aligns CEOs' interests to shareholders' benefits. Overall, our findings support the view that firm ownership aligns CEOs' interests with shareholders' benefits, rather than enhancing CEOs' power to extract private benefits.

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