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Saving for whose pocket? Divergence between employee wages and corporate cash holdings

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  • Lu, Chien-Lin

Abstract

We use novel data for Taiwan to examine the relationship between wage differential and corporate cash holdings. The two main forces behind wage expenses, manager and employee wages, play different roles in this relationship. We find that employee wages positively affect cash holdings, and their effect mainly results from the precautionary motive. Manager wages have a relatively weak effect on cash holdings, but their effect is only visible when the agency motive is high. We identify these motives through the heterogeneity of employee turnover rate, female-worker coverage ratio, and financial constraints. Important revisions in the Labor Standards Act and Business Entity Accounting Act help address endogeneity. We also find that firms are likely to save cash from internal cash flows when employee wages increase, while firms with higher manager wages prefer debt financing. By decomposing wage expenses, we show that firms are likely to save cash for employees from firm's pockets.

Suggested Citation

  • Lu, Chien-Lin, 2024. "Saving for whose pocket? Divergence between employee wages and corporate cash holdings," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
  • Handle: RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23002755
    DOI: 10.1016/j.pacfin.2023.102204
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    More about this item

    Keywords

    Cash holdings; Employee relation; Wage inequality;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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