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CEO entrenchment and corporate liquidity management

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  • Elyasiani, Elyas
  • Zhang, Ling

Abstract

CEO entrenchment distorts firms’ liquidity policy because entrenched CEOs and shareholders have conflicting preferences for liquidity. We investigate the association between firms’ liquidity level/mix and entrenchment within a system model accounting for endogeneity. Several results are obtained. Entrenched CEOs (i) hold more liquidity because it helps reduce their firm’s risks, provides them with job and wealth security, and gives them discretion in pursuing personal objectives; (ii) prefer cash over lines of credit (LCs) because the latter are accompanied by bank monitoring; and (iii) use more LCs, despite their associated monitoring, because they provide extra liquidity. Sample disaggregation shows that increased liquidity due to CEO entrenchment can be attributed to smaller and more opaque firms – large and transparent firms maintain their liquidity levels but increase their shares of cash. These findings imply that firms should align the interests of entrenched CEOs with those of shareholders to reduce the undesirable effects of entrenchment on liquidity management.

Suggested Citation

  • Elyasiani, Elyas & Zhang, Ling, 2015. "CEO entrenchment and corporate liquidity management," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 115-128.
    • Handle: RePEc:eee:jbfina:v:54:y:2015:i:c:p:115-128
    DOI: 10.1016/j.jbankfin.2015.01.014
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    More about this item

    Keywords

    CEO entrenchment; Corporate liquidity management; Stakeholders;
    All these keywords.

    JEL classification:

    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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