The importance of managerial discretion on managerial ability–firm cash holding nexus

Abstract

PurposeThis paper examines the role of managerial discretion in the relation between managerial ability on the level of corporate cash.Design/methodology/approachConjoining the upper echelons theory's premises and the theoretical framework of cash holdings, we posit that the managerial ability's effect on cash policy varies with managerial discretion using firm-level data. To test the empirical prediction, we employ a linear regression model with fixed effects with a sample of US listed firms from 1980 to 2016.FindingsThe findings reveal that the positive association between the ability of chief executive officers and corporate cash savings is weakened by firm-level managerial discretion. The results are robust to various additional analyses, namely lagged independent variables regression, reduced form regression and granger causality test. Overall, the findings are generally consistent with the cash holding motives yielding transaction and precautionary demand for money. However, our findings also shed light on whether managerial discretion moderates or exacerbates agency problems related to top executives' cash holding policies.Originality/valueThis work's distinct characteristic is the investigation of the joint effect of managerial talent and discretion on a firm's cash holding, which remains unexplored in the literature.