Can Equity Incentives Restrain Defensive Behaviors in Corporate Cash Holding Decisions?

Abstract

The present study aims to explore the effect of equity incentive intensity on defensive behavior in enterprise cash holding decision-making using ordinary least squares, System GMM, and Heckman tests. This study finds that the higher the intensity of equity incentives, the lower the level of corporate excess cash holdings. The intensity of equity incentives inhibits defensive behavior in corporate cash holding decisions. A substitute relationship is observed between equity incentive intensity and product market competition in the inhibition of management defensive behavior in cash holding decision. Our further research finds that the inhibitory effect of equity incentive intensity on the defensive behavior of cash holding decisions mainly exists in the case of ineffective supervision by large shareholders and creditors. For theoretical contribution, this paper tries to explore the governance effect of equity incentive on the management defensive behavior in a company’s cash holding decision making. It also reveals the substitute relationship between the intensity of equity incentive and the product market competition in suppressing the management defensive behavior in the cash holding decision of enterprises. Moreover, it provides new evidence for the governance effect of equity incentive in the institutional environment and expands the literature on equity incentive effects.