Agency Conflicts and Cash: Estimates from a Structural Model

Boris Nikolov (University of Rochester) presenting 'Agency Conflicts and Cash: Estimates from a Structural Model' - Abstract: We estimate a dynamic model of firm investment and cash accumulation to ascertain whether agency problems affect corporate cash holding decisions. We model four specific mechanisms that misalign managerial and shareholder incentives: managerial bonuses based on current profits, limited managerial ownership of the firm, a managerial reference for firm size, and managerial perquisite consumption. Interestingly, we find nonmonotonic relations between features of cash policy and both perquisites and size preference. Our estimates indicate that agency issues related to perquisites are more important for explaining corporate cash holding than issues related to empire building. We also find that firms with lower blockholder and institutional ownership have higher managerial perquisite consumption. These agency problems result in a 22% increase in cash and a loss to equity holders of approximately 6%.