Chief executive officer ability and cash holding decision

Abstract

Purpose

This paper aims to consider the effect of the chief executive officer’s (CEO) ability on the amount of cash stock at the firm level.

Design/methodology/approach

The empirical hypothesis is examined via fixed-effect regression models using data from US incorporated firms.

Findings

Consistent with the upper echelon theory and cash holding motives, the results reveal that able CEOs are associated with an increased level of cash stock, ceteris paribus. Further analysis shows that the association between CEO ability and firm cash holding is more profound for financially sound firms. The authors also demonstrate that firm size significantly affects the relationship between CEO ability and cash management. The results are robust to various sensitivity analyses and additional tests.

Research limitations/implications

This work is subject to limitations inherent in the use of relevant proxies. Thus, the study implements several model specifications to ensure the validity of findings in a more generic context. Future research should investigate the board structure’s role and the monitoring procedures on the CEOs’ cash holding behavior as a natural extension to this study.

Practical implications

The insights derived from the study are expected to advance the decision-making process of cash policies and CEO selection for shareholders, business executives and investment strategists.

Originality/value

Overall, the study provides new evidence that CEO ability is a contingent factor of corporate cash stock.

Citation

Magerakis, E. (2022), "Chief executive officer ability and cash holding decision", Review of Accounting and Finance, Vol. 21 No. 5, pp. 449-485. https://doi.org/10.1108/RAF-10-2021-0284