Managerial ability, financial constraints, and the value of cash holding

ABSTRACT

We find that a skilful CEO, who persistently performs well over several years, can reduce a firm’s financial constraints. Our finding is robust to an instrumental variable regression, different definitions of a skilful CEO, and alternative measures of financial constraints. Further, we provide evidence that skilful managers improve the value of their firms’ cash holdings. Thus, this study contributes to the literature by exploring a potential bright side of managerial ability.

KEYWORDS:

• Managerial ability
• skilful CEOs
• financial constraint
• cash holding

JEL CLASSIFICATION:

• G30
• G39

Acknowledgments

We would like to thank Yanzhi Wang, Iftekhar Hasan, and seminar participants at National Taiwan University and the International Conference on Business, Big Data, and Decision Sciences (ICBBD 2019) for the helpful comments. Any remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Our findings hold if we use the previous five years to define MA_Skill.

² The results are similar if we use each instrument separately.