Suchergebnisse

Purpose
The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision.


Design/methodology/approach
Firms following this policy are identified both by using a fixed classification approach and the analysis of the distribution of cash and leverage. Logit analysis is then used to estimate the probability of adopting the policy as a function of executive ownership.


Findings
Extreme financial policies are suboptimal as firms adopting these policies tend to undershoot (overshoot) their target leverage (cash holdings) ratios. The impact of the executive ownership on the probability of adopting this policy is U-shaped, in line with the alignment–entrenchment hypothesis.


Practical implications
Despite the substantial presence of non-executive directors in the boards and a significant amount of shareholdings by executive directors, the firms under analysis have adopted suboptimal financial policies possibly because poorly governed or because executive ownership is the range where entrenchment is feasible.


Originality/value
This is the first attempt at recognising policies of high cash and low leverage as being explicitly interdependent. It is also the first study focussing on the UK, a country of interest, because ownership structure is relatively dispersed. Moreover, instead of choosing fixed threshold levels of the variable in defining the extreme financial policy, this paper proposes the analysis of the distribution of cash holdings and leverage and accounts for target levels of cash and leverage.

PurposeThe aim of this paper is to investigate the dynamics between executive ownership and excess cash policy in the UK.Design/methodology/approachThe authors identify firms adopting an excess policy using a joint criterion of high cash and cash higher than the target. Logit analysis is used to estimate the impact of executive ownership and other governance characteristics on the probability of adopting an excess cash policy.FindingsThe results suggest that, in the UK, the impact of the executive ownership on the probability of adopting an excess cash policy is non-monotonic, in line with the alignment-entrenchment hypothesis. The results are robust to different definitions of excess cash policy, to alternative specifications of the regression model, to different estimation frameworks and to alternative proxies of ownership concentration.Research limitations/implicationsThe authors' approach provides a new measure of the excess target cash for the firm. They show the need to identify an excess target cash policy not only by using an empirical criterion and a theoretical target level of cash, but also by capturing persistence in deviation from the target cash level. The authors' measure of excess target cash calls into questions findings from previous studies. The authors' approach can be used to explore whether excess cash holdings of UK firms and the impact of managerial ownership have changed from before the crisis to after the crisis.Practical implicationsThe authors' measure of excess target cash allows identifying in practice levels of cash which are abnormal with respect to an equilibrium level. UK firms should be cautious in using executive ownership as a corporate governance mechanism, as this may generate suboptimal cash holdings and suboptimal firm value. Excess cash policy might be driven not only by a poor corporate governance system, but also by the interplay between agency costs of managerial opportunism and cost of the external finance which further research could explore.Originality/valueActually, "how much cash is too much" is a question that has not been addressed by the literature. The authors address this question. Also, this amount of cash allows the authors to study the extent to which executive ownership contributes to explain the out-of-equilibrium persistency in the cash level.

Purpose
Using a sample of US firms more likely to be affected by agency problems, the purpose of this paper is to investigate the relationship between corporate value and financial policies and to study whether credit market freedom (CMF) affects this relationship.


Design/methodology/approach
The authors identify a sub-sample of non-financial US firms potentially affected by agency problems using a joint criterion of over-investment and high cash-holdings. A generalized method of moment econometric framework is then used to estimate the impact of cash-holdings and leverage policies on firm value for this sub-sample. This exercise is also performed by taking into account the level of CMF of the state where the firm operates.


Findings
The results show that the relationship between cash-holdings – or leverage – and firm value is "U-shaped." In addition, when the authors focus on the role played by the level of CMF, the authors find a number of interesting facts: CMF facilitates the firms' access to external finance, thereby relaxing the need of internal funds for investing; the relationship between cash-holdings and firm value is "U-shaped" only in states enjoying high levels of CMF; the probability of observing firms more likely to be affected by agency problems is higher in states with high levels of CMF.


Research limitations/implications
The empirical findings provide important insights to policymakers, shareholders and practitioners. To policymakers, the results suggest that providing institutional environments with greater CMF can enhance the firm access to external finance, the level of corporate investment and the economic growth. To shareholders, the findings highlight that the conflicts of interest between managers and shareholders may be more severe in states with higher CMF; therefore, adequate financing policies and corporate governance mechanisms must be used to mitigate these conflicts and maximize the firm value. Finally, to practitioners, the evidence suggests that, in valuing a firm, they must take into consideration whether the economic environment provides managers with more freedom to stockpile cash and invest sub-optimally.


Originality/value
The paper contributes to the corporate finance and governance literature in two respects. First, it provides new evidence on the shape of the relationship between cash holdings and firm value for firms affected by empire-building managers. Second, at the best of the knowledge, it is the first corporate finance study, which analyzes the role played by the CMF at the state level on the capital structure and the level of investment of the firms.