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560205 |
| Дата создания |
2020 |
| Страниц |
48
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Содержание
Contents
1 Introduction ............................................................................................................ 5
2 Literature review .................................................................................................... 8
2.1 Managerial entrenchment ......................................................................... 8
2.2 Corporate liquidity management ............................................................ 10
2.3 Capital structure and managerial entrenchment ..................................... 15
3 Empirical framework ........................................................................................... 17
3.1 Hypothesis development ......................................................................... 17
3.2 Model specification ................................................................................ 18
3.3 Data and summary statistics ................................................................... 25
4 Results .................................................................................................................. 29
4.1 Results discussion ................................................................................... 29
4.2 Robustness checks .................................................................................. 33
5 Conclusion ........................................................................................................... 37
6 References ............................................................................................................ 39
7 Appendices ........................................................................................................... 45
Введение
1 Introduction
Increasing cash reserves of American corporations attracted a lot of attention both by public and academic community. Bates et al. (2009) documented a significant cash-to-assets ratio increase from 10.5% in 1980 to 23.2% in 2006. For example, Apple Inc. had $146 billion in cash and cash equivalents in the summer of 2013 year while the companies included in the S&P 500 index held a total of $1.2 trillion in cash what is more than the GDP of both Mexico and South Korea. Cash holdings are accounted over one-fifth of total assets owned by a firm (Fresard, 2010). Such huge numbers stress an importance of proper liquidity management especially for those companies that face difficulties with obtaining outside financing. One of the problems associated with a corporate liquidity management is a conflict of interests between managers and shareholders. The problem itself is inherent in a separation of ownership and control (Smith, 1852). Jensen and Meckling (1976) defined this problem between managers and principal shareholders as an agency problem. Further papers (Shleifer and Vishny 1989, Charreaux 1997, Pige 1999) introduced a notion of entrenchment and described entrenchment strategy main stages: valorization, control reduction and increase in consumption. Of course, managerial consumption of private benefits negatively affects firm performance (Morck et al. 1988, Hiller and McColgan 2001, Lins and Kalcheva 2004). Conflict of interests between shareholders and managers become more severe when the company faces large free cash flows (Jensen 1986, Stulz 1990). Due to the fact that company growth positively affects managers’ compensation and power, managers have incentives to boost the growth beyond optimal levels and engage in ‘empire-building’ (Murphy 1985). Such a behavior results in investing below the cost of capital or investments with negative net present value and value-destructing acquisitions (Harford, 1999). Taking into account entrenched managers desire to dissipate cash and their preference of cash over fixed assets (Myers and Rajan 1998) another aspect that plays a crucial role in this problem is a level of corporate governance. Many papers state that weaker corporate governance leads to excess spending (Dittmar and Mahrt-Smith 2007, Harford et al. 2008, Sheu and Lee 2012) and higher levels of cash holdings (Pinkowitz et al. 2004, Basil and Clark, 2016). Research papers investigating effects of agency conflict on corporate liquidity management focused mainly on cash component exclusively. Sufi (2009) mentioned that 87% of companies use credit lines what shifted the research focus to the total liquidity of the company. Findings on the total liquidity are quite controversial. On the one hand, usage of bank credit lines limits the power of managers via monitoring, covenants and increased bank oversight what predicts that entrenched managers prefer cash over lines of credit (Yun, 2009, Elyasiani and Zhang 2015). On the other hand, they tend to hold more lines of credits than assets because of extra liquidity provided by the credit lines (Elyasiani and Zhang, 2015). By the same logic, entrenched managers tend to have a higher
5
leverage (Bunkanwanicha et al. 2008) but relationship between the leverage and cash holdings is often non-linear (Thanatawee 2019, Ji et al. 2019).
This research paper provides an extended analysis of agency cash holding motive. Panel data on Russian public companies from 2015 year to 2019 year is taken as a research sample. Final data accounted for 574 observations for 127 companies from eight sectors (excluding financial institutions and utilities). Instead of looking at the managerial entrenchment alone I performed a deep analysis accounting for different aspects of agency problem simultaneously: CEO entrenchment, corporate governance, CEO tenure, CEO ownership and leverage of the company. The CEO entrenchment is measured using provision-approach index proposed by Bebchuk et al. (2009). Corporate governance would be proxied using a modified version of governance index (Gompers et al. 2003) composed out of eight components: board size, number of board meeting, proportion of independent directors, audit committee existence and activity, renumeration and HR committee existence and activity and disclosure of management renumeration. The CEO tenure was included in the model explicitly rather than indirectly (Elyasiani and Zhang 2015) as it takes time to build relations with board of directors. The CEO ownership was also considered in the model explicitly as higher managerial ownership (taking into account presence of non-linearity) is often supposed to decrease conflict of interests and insure value maximization (Pige 1999, Hillier and McColgan 2001). Integration of the leverage in the model allows to receive more insights both the perspective of corporate liquidity management and capital structure as agency costs are inherent in each of them. Additionally, I would re-examine the model using alternating leverage definition - market based leverage. During the research process different specifications were used including interactions technique. Each of the main variables was multiplied by a set of sector dummy variables and checked for significance. Ownership was the only one variable showing obvious significance. Such a procedure allowed to use ownership interactions for further analysis and robustness checks. Control variables are used to introduce in the model other cash holding motives (transaction and precautionary). Tax motive (Foley et al. 2007, Falkeunder and Petersen 2012) was not taken into account as this motive is not expected to be significant for Russian public companies and Bloomberg data does not specify foreign income for them.
Several results were obtained. Regression analysis showed statistical insignificance of CEO entrenchment in determination of cash-to-assets ratio what may be due to small research window or insufficient detalization of corporate governance structure reports. Corporate governance index and CEO tenure negatively influence the cash-to-assets ratio. A sign of the corporate governance coefficient is consistent with a classical curing effect of control mechanisms over the agency conflict. Positive tenure coefficient can be explained by CEOs desire to maintain reputation (Lim and Lee, 2019). The data showed no statistical significance of CEO ownership on the corporate cash
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holdings. Interactions approach contributes to the existing literature deeper investigating significance and insignificance drivers of the ownership. This technique revealed that energy and communications sectors interactions are statistically significant in determination of the cash ratio what is consistent with the interest-alignment hypothesis. Finally, empirical analysis showed a negative relation between corporate leverage choice and the cash-to-assets ratio. Such a result supports papers that characterize leverage as an alternative liquidity instrument and rejects existence of debt entrenchment motive that predicts that companies with an entrenched CEO tend to use excess liquidity. Empirical results are robust to alternative regression specifications and account for fixed effects. Two main research limitations should be mentioned. Firstly, it is a narrow research window what is explained by the fact that Russian public companies started to publish more detailed reports following the crisis of 2014 year. Secondly, it is vague detalization of corporate governance reports. Some companies mention that particular governance principles are not stated officially in charter but are followed at practice what makes construction of indexes less accurate. This research contributes to an understanding of agency cash holding motive. Moreover, it suggests mechanism able to reduce a problem of managerial entrenchment and improve corporate liquidity management.
The rest of the paper is structured in the following way. First part reviews the existing literature: a definition of managerial entrenchment and entrenchment strategy, corporate liquidity management and its mechanisms and a relational analysis between managerial entrenchment and its effects on a firm value and corporate liquidity. Second part of the paper deals with hypotheses development, model specification, explanation of methodology and sample data discussion. The last part describes all the findings and presents the robustness checks.
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