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Distracted institutional shareholders and corporate cash holdings

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  • Cheung, Adrian (Wai Kong)
  • Hasan, Mostafa Monzur
  • Khoo, Joye

Abstract

We investigate whether institutional investors’ distraction affects corporate cash holdings. We also investigate two channels that may explain the relationship (if any) between institutional shareholder distraction and corporate cash holdings. First, the acquisition channel predicts that a reduction of monitoring intensity allows the firm to engage in costly and value-destroying acquisitions and this, in turn, lowers cash holdings. Second, the payout channel suggests that firms with distracted shareholders are associated with dividend cuts, and therefore, shareholder-distraction-related payout cuts may leave the firm with more cash holdings. Using 26,727 firm-year observations (3813 unique firms) over the period 1980 to 2010, we find evidence that institutional shareholder distraction is negatively associated with corporate cash holdings. We also find that this effect is driven mainly by the acquisitions channel. The evidence is robust to an alternative estimation method and alternative measures of key variables.

Suggested Citation

  • Cheung, Adrian (Wai Kong) & Hasan, Mostafa Monzur & Khoo, Joye, 2021. "Distracted institutional shareholders and corporate cash holdings," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 453-466.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:453-466
    DOI: 10.1016/j.iref.2020.08.018
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    More about this item

    Keywords

    Distracted shareholders; Cash holdings; Acquisitions; Total payout;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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