Do CEO demographics explain cash holdings in SMEs?

This study examines the idiosyncratic manager-specific influence on corporate cash holdings. Although traditional economic theories such as trade-off theory, financial hierarchy theory and agency free cash flow theory have already contributed to a deeper understanding of corporate cash policy, we examine whether the integration of the Upper Echelons Theory (UET) into these traditional theories provides additional power in explaining corporate cash holdings. We contend that social, psychological and cognitive characteristics of CEOs, proxied by a number of CEO demographics, affect the level of importance that CEOs (and shareholders) attach to the economic arguments provided by the traditional theories, in turn affecting cash policy. We test our hypotheses using a sample of Belgian privately held SMEs. Controlling for the impact of traditional economic theories our findings suggest that older CEOs and CEOs without experience in other industries are more concerned with the precautionary motive of cash and less concerned with the opportunity cost of cash, giving rise to higher cash levels compared to younger CEOs and CEOs with other-industry experience. This indicates that cash policy in Belgian privately held SMEs reflects the natural tendencies of CEOs. Since cash policy affects shareholder value, it is important for stakeholders to consider the demographics of present or new CEOs and to understand their associated inclinations concerning cash policy.