Making the Link: Cash Holdings, Managerial Ability and Discretion

Abstract

While prior research has extensively investigated the association between firm-level attributes and CEO's characteristics, there is little evidence on whether the managerial ability is associated with cash holdings. In this paper, we examine the link between managerial ability and corporate cash holdings using data on U.S. non-financial firms from 1980 to 2016. We find that high-ability managers are expected to hold more cash than their counterparts of lower ability. Furthermore, the study focuses on how corporate cash holdings decision is affected by the joint effect of managerial discretion and managerial ability. The empirical findings suggest that firms with high levels of managerial discretion (i.e., prospectors) allow highly skilled managers to pursue corporate goals by accumulating large amounts of cash; the relation for firms with lower discretion (i.e., defenders) is ambiguous. The contribution of our study is to further examine the value and effectiveness of high-quality management in explaining disparities in decision making related to cash holdings.