cash during economic crises to buy assets from distressed
firms at bargain prices. The advantage to holding cash
becomesmuchsmallerindevelopedmarketsbutitwillstill
exist.
Management Interests
Aswenotedatthestartofthesection,theonevariablethat
setsasidepubliclytradedcompaniesfromindividualsisthe
separation of management and ownership. The cash may
belong to the stockholders but the managers maintain the
discretiononwhetheritshouldbereturnedtostockholders(in
theform of dividendsand stock buybacks) orheldby the
firm.Inmanyfirms,itcanbearguedthatmanagershavetheir
ownagendastopursueandthatcashprovidesthemwiththe
ammunition to fund the pursuit.
10 Thus, a CEO who is intent on empire building will
accumulatecash,notbecauseitisgoodforstockholders,but
because it can be used to fund expansion.
11 Ifthisrationaleholds,wewouldexpectcashbalancesto
vary across companies for the following reasons:
- Corporate governance. Companies where
stockholdershavelittleornopowerovermanagers,
because of either corporate charter amendments,
inertia, or shares with different voting rights, will
accumulate more cash than companies where
managers are held to account by stockholders.
12 - Insiderholdings.Ifinsidersholdlargeblocksofthe
companyandalsoarepartofthemanagementofthe
company, we would expect to see larger cash
balances accumulating in the company.