General Managerial Ability and Corporate Cash Holdings

Abstract

This article examines whether the general managerial ability of a chief executive officer (CEO) is associated with corporate cash holdings. Integrating the agency and upper echelon theories, we predict that generalist CEOs hold more cash to meet the firm’s obligations or exploit future investment and growth opportunities. To test this conjecture, we incorporate the general managerial ability measure of Custodio et al. (2013) to the cash estimation model developed by Bates et al. (2009). The paper applies linear regression analysis with fixed effects by firm and year. Based on the findings, we confirm that general managerial ability is a valid determinant of corporate cash holdings. We find supportive evidence that extensive levels of human capital generality may result in a higher level of cash. Additional findings indicate that the effect of general managerial ability on the cash to total assets ratio is higher for financially constrained firms. We further show that the positive impact of general managerial ability on cash holdings is more evident for firms with higher levels of industry competition and low-tech industries. The empirical findings should assist investors, financial analysts, and shareholders in better understanding the CEOs’ effect on cash holdings at the firm level. This study addresses the debate concerning the implications of CEO experience in firm-level context. We contribute to the literature by examining how corporate policies are linked to managerial characteristics and how the CEO’s professional expertise influences corporate cash holdings. Our evidence adds to the existing knowledge about the real effects of CEOs skills and partially explains the variation in firm cash holdings.