Subordinate executives’ horizon and cash holdings

Abstract

This study investigates whether internal governance stemming from subordinate executives' employment horizons affects corporate cash holdings. Consistent with the idea that key subordinate executives provide checks and balances within a firm and affect corporate decisions, we find cash holdings increase with subordinate executives' horizon, supporting the precautionary motive for the former. Controlling for alternative explanations, the positive association between internal governance and cash holdings is hardly affected by the agency motive, tournament incentives between CEO and subordinate executives or confidence level of executives. Our findings are also robust to alternative measures of subordinate executives' horizon and cash holdings and are not driven by endogeneity issues. The analysis of cash sources documents that firms with longer subordinate executives’ horizon save a higher proportion of cash proceed through reduced dividend payouts and equity issuance, rather than debt. This study contributes to the literature by shedding light on how diverse agents with different employment horizons in the top management team influences the liquidity policy of the firm.