Abstract
It is often suggested that the takeover market is appropriate for containing the agency problems of excessive corporate liquidity. However, recent work shows that this is not the case. This paper focuses on the takeover-deterrence effects of corporate liquidity and suggests the proxy contest as an effective alternative control mechanism for alleviating the excess liquidity problem. I find that firms targeted in a proxy fight hold 25% more cash than comparable firms not targeted, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is significantly positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase while cash holdings revert to normal levels.
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