Boris Nikolov

Agency Conflicts and Cash: Estimates from a Dynamic Model

We estimate a dynamic model of firm investment and cash accumulation to ascertain whether agency problems affect corporate cash holding decisions. We model four specific mechanisms that misalign managerial and shareholder incentives: managerial bonuses based on current profits, limited managerial ownership of the firm, a managerial preference for firm size, and managerial perquisite consumption. Interestingly, we find nonmonotonic relations between features of cash policy and both perquisites and size preference. Our estimates indicate that agency issues related to perquisites are more important for explaining corporate cash holding than issues related to empire building. We also find that firms with lower blockholder and institutional ownership have higher managerial perquisite consumption. These agency problems result in a 22% increase in cash and a loss to equity holders of approximately 6%.

Dynamic Corporate Liquidity

In contrast to cash holdings, credit lines give firms financial flexibility by providing liquidity contingent on realized funding needs, but they are often limited by collateral and covenants. We embed this trade-off into an estimated dynamic model of financing and investment. Our model highlights the relevance of drawing down credit lines to fund investment options in an effective way and quantitatively matches well the levels and dynamics of cash, credit lines, and leverage. In the cross-section, modeling credit lines as contingent liquidity provides novel empirical predictions and rationalizes several stylized facts regarding credit line usage, covenant violations, and cash holdings.