Investor protection, managerial entrenchment, and cash holdings: Cross‐country evidence

Abstract

AbstractWe investigate whether investor protection (i.e. shareholder protection and creditor rights) is associated with how entrenched managers set corporate cash holdings. Our sample covers more than 6,000 firms from 29 countries (roughly 16,000 observations during 2010–2013). We find that the entrenchment–cash holdings association is sensitive to the level of shareholder protection but not to the level of creditor rights. Moreover, we find that the way shareholder protection shapes this association depends upon how managers become entrenched. When managers become entrenched through ownership, shareholders consent to their preferences to hold more cash, whereas, when managers become entrenched through CEO duality, shareholders force them to disgorge cash. We interpret our findings as evidence that shareholders agree to increase cash when managers are aligned with them by ownership but prefer to decrease cash when they are not aligned, whereas creditors do not influence entrenched managers’ cash holdings decisions.