Corporate Risk-Taking and Cash Holdings Adjustment Speed: The Moderating Role of CEO Tenure
Subject Areas : Financial Accounting
Mahdi Kazemiolum
1
,
Mohsen Khotanlou
2
,
Noor Zaki Nabbat
3
1 -
2 -
3 -
Keywords: Corporate Risk-Taking , Adjustment Speed , CEO Tenure , Generalized Method of Moments ,
Abstract :
The motivations driving cash holdings have a profound influence on corporate decision-making and performance. Exploring the dynamics between risk-taking behaviour, cash reserves, and their adjustment pace provides valuable insights into effective financial resource management. This study examines the impact of corporate risk-taking on the adjustment speed of cash holdings, with a focus on the moderating effect of CEO tenure. A sample of 151 firms listed on the Tehran Stock Exchange from 2011 to 2023 (1,963 firm-year observations) was analysed using multiple regression and the Generalized Method of Moments (GMM) estimator. Results indicate that the adjustment speed of cash holdings is 49.5%. A significant negative relationship exists between corporate risk-taking and the speed of cash holdings adjustment, suggesting that elevated risk-taking decelerates the alignment of cash reserves with optimal levels. Moreover, the findings highlight the moderating role of CEO tenure in the relationship between corporate risk-taking and the speed of cash holdings adjustment; in other words, in firms with longer-tenured CEOs, the negative association between corporate risk-taking and cash holdings adjustment speed is weaker than in firms with shorter-tenured CEOs. These findings suggest that risk-taking hinders swift cash adjustment, necessitating a precise determination of optimal cash levels to prevent liquidity shortages in high-risk scenarios. Additionally, the experience of long-tenured CEOs appears to facilitate better liquidity management, aligning corporate interests with strategic financial goals.
[1] Acharya VV, Almeida H., Campello M., Is cash negative debt? A hedging perspective on corporate financial policies,J Financ Intermed. ,2007;16(4):515-54. Doi:10.1016/j.jfi.2007.04.001
[2] Acharya VV., Almeida H., Campello M., Aggregate risk and the choice between cash and lines of credit, J Finance, 2013;68(5):2059-116. Doi:10.1111/jofi.12056
[3] Acharya VV, Amihud Y, Litov L., Creditor rights and corporate risk-taking, J Financ Econ. ,2011;102(1):150-66. Doi:10.1016/j.jfineco.2011.04.001
[4] Aflatooni A., Ivani F., Khatiri M., COVID-19, cash holdings level, and its adjustment speed, Modiriat Darayi va Tamin Mali, 2024;12(4):37-58. Doi:10.22108/amf.2024.139959.1842. (In Persian)
[5] Aflatooni A., Kazemi P, Khatiri M., Comparison of cash holdings adjustment speed during economic booms and recessions, Rahbord Modiriat Mali,2022;10(2):141-60. Doi:10.22051/jfm.2022.37631.2596. (In Persian)
[6] Ahmad HH, Azhari A., The performance and corporate risk-taking of firms: Evidence from Malaysian agricultural firms,J Agribusiness Dev Emerg Econ. ,2021;12(5):791-808. Doi:10.1108/JADEE-11-2020-0267
[7] Al-Hamshari FSA, Ariff AM, Kamarudin KA, Majid NA., Corporate risk-taking and cash holdings: The moderating effect of investor protection, Capital Markets Review, 2023;31(1):1-23.
[8] Al-Hamshari FSA, Ariff AM, Kamarudin KA, Majid NA.,Corporate risk-taking, financial constraints and cash holdings: Evidence from Saudi Arabia, Int. J. Islam Middle East Finance Manag.,2024, Doi:10.1108/IMEFM-11-2023-0455
[9] Almeida H., Campello M., Weisbach MS., The cash flow sensitivity of cash, J Finance, 2004;59(4):1777-804. Doi:10.1111/j.1540-6261.2004. 00679.x
[10] Arslan Ö, Florackis C, Ozkan A., The role of cash holdings in reducing investment-cash flow sensitivity: Evidence from a financial crisis period in an emerging market, Emerg Markets Rev. ,2006;7(4):320-38. Doi: 10.1016/j.ememar.2006.09.003
[11] Azis M., Hadjaat M., Rositawati, Darma DC., Evaluation of systematic risk, corporate governance, and cash holding: Evidence from Indonesia, Econ Dev., 2021;20(1):35-45. Doi:10.21511/ed.20(1).2021.04
[12] Bates TW, Kahle KM, Stulz RM. Why do U.S., firms hold so much more cash than they used to? J Finance., 2009;64(5):1985-2021. Doi:10.1111/j.1540-6261.2009. 01492.x
[13] Belghitar Y, Clark E., Convexity, magnification, and translation: The effect of managerial option-based compensation on corporate cash holdings, J Finance Res., 2014;37(2):191-210. Doi:10.1111/jfir.12034
[14] Bhuiyan MBU, Cheema MA, Man Y., Risk committee, corporate risk-taking, and firm value, Manag Finance, 2021;47(3):285-309. Doi:10.1108/MF-07-2019-0322
[15] Bonsall SB, Holzman E., Miller BP., The role of management talent in the production of informative regulatory filings, Kelley School Bus Res Paper, 2018;17-65. Doi:10.2139/ssrn.3029669
[16] Chay JB, Suh J. ,Payout policy and cash-flow uncertainty, J Financ Econ., 2009;93(1):88-107. Doi: 10.1016/j.jfineco.2008.12.001
[17] Chireka T., Moloi T., Managerial ability and corporate cash holdings adjustment speed in South African listed firms, Acta Commercii., 2023;23(1). Doi:10.4102/ac. v23i1.1180
[18] Cho H., Choi S., Kim MO. ,Cash holdings adjustment speed and managerial ability, Asia-Pac J Financ Stud., 2018;47(5):695-719. Doi:10.1111/ajfs.12235
[19] Chowdhury R., Doukas JA, Park JC., Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment, J Corp Finance, 2021; 69:102029. Doi: 10.1016/j.jcorpfin.2021.102029
[20] Cid-Aranda C., López-Iturriaga F., CEO characteristics and corporate risk-taking: evidence from emerging markets, Econ Res-Ekonomska Istraživanja, 2023;36(2):2175008. Doi:10.1080/1331677X.2023.2175008
[21] Da Cruz AF, Kimura H., Sobreiro VA., What do we know about corporate cash holdings? A systematic analysis, J Corp Account Finance, 2019;30(4):77-143. Doi:10.1002/jcaf.22368
[22] Das BC., Hasan F., Sutradhar SR., The impact of economic policy uncertainty and inflation risk on corporate cash holdings, Rev Quant Finance Account., 2024;62(3):865-87. Doi:10.1007/s11156-023-01224-6
[23] Denis DJ., Sibilkov V., Financial constraints, investment, and the value of cash holdings, Rev Financ Stud. ,2010;23(1):247-69. Doi:10.1093/rfs/hhp031
[24] Dittmar A., Mahrt-Smith J. ,Corporate governance and the value of cash holdings, J Financ Econ., 2007;83(3):599-634. Doi: 10.1016/j.jfineco.2005.12.006
[25] El-Halaby S., Abdelrasheed H., Hussainey K. ,Corporate cash holdings and national culture: Evidence from the Middle East and North Africa region, J Risk Financ Manag., 2021;14(10):475. Doi:10.3390/jrfm14100475
[26] Emamgholipour Archi M., Nabavi Chashmi SA., Dadashi I., Shafiee Kakhki M., Investigating the asymmetric models of cash holding adjustment speed: dummy variable, quadratic and threshold regression models, Adv Math Finance Appl., 2023; May 1;8(2):367-83. Doi: 10.22034/amfa.2022.1947856.1670.
[27] Farag H., Mallin C., The impact of the dual board structure and board diversity: Evidence from Chinese initial public offerings (IPOs), J Bus Ethics., 2016;139(2):333-49. Doi:10.1007/s10551-015-2649-6
[28] Gan H., Park MS. CEO managerial ability and the marginal value of cash, Adv Account. ,2017; 38:126-35. Doi: 10.1016/j.adiac.2017.07.007
[29] Goodman TH., Neamtiu M., Shroff NA., White HD., Management forecast quality and capital investment decisions, Account Rev., 2014;89(1):331-65. Doi:10.2308/accr-50575
[30] Gryglewicz S. ,A theory of corporate financial decisions with liquidity and solvency concerns, J Financ Econ., 2011;99(2):365-84. Doi: 10.1016/j.jfineco.2010.09.010
[31] Habib A., Hasan MM., Firm life cycle, corporate risk-taking and investor sentiment, Account Finance, 2017;57(2):465-97. Doi:10.1111/acfi.12141
[32] Hambrick DC, Mason PA., Upper echelons: The organization as a reflection of its top managers, Acad Manag Rev. ,1984;9(2):193-206. Doi:10.5465/amr.1984.4277628
[33] Hambrick DC., Fukutomi GDS., The seasons of a CEO's tenure. Acad Manage Rev. ,1991;16(4):719-742. Doi:10.5465/amr.1991.4279621
[34] Han S., Qiu J., Corporate precautionary cash holdings, J Corp Finance, 2007;13(1):43-57. Doi: 10.1016/j.jcorpfin.2006.05.002
[35] Haushalter D., Klasa S., Maxwell WF. , The influence of product market dynamics on a firm’s cash holdings and hedging behavior, J Financ Econ. ,2007;84(3):797-825. Doi: 10.1016/j.jfineco.2006.05.007
[36] Hoang K., Nguyen C., Tran DV., Phan A., International corporate cash holdings and firm-level exposure to COVID-19: Do cultural dimensions matter? J Risk Financ Manag., 2022;15(6):262. Doi:10.3390/jrfm15060262
[37] Hugonnier J., Malamud S., Morellec E., Capital supply uncertainty, cash holdings, and investment, Rev Financ Stud., 2015;28(2):391-445. Doi:10.1093/rfs/hhu081
[38] Hunjra AI, Tayachi T, Mehmood R, Hussain A. ,Does economic risk affect corporate cash holdings? J Econ Adm Sci., 2022;38(3):471-84. Doi:10.1108/JEAS-05-2020-0069
[39] Jensen MC. ,Agency costs of free cash flow, corporate finance, and takeovers, Am Econ Rev. ,1986;76(2):323-9. https://www.jstor.org/stable/1818789
[40] Jiang F., Jiang Z., Huang J., Kim KA., Nofsinger JR., Bank competition and leverage adjustments, Finance Manag. ,2017;46(4):995-1022. Doi:10.1111/fima.12174
[41] Keynes JM. The general theory of employment, interest and money, Macmillan; 1936.
[42] Liu C., Shi W., Wei KCJ., Generalist versus specialist CEOs: The impact of CEO expertise on the design of compensation contract, Southwestern University of Finance and Economics, 2020; Doi:10.2139/ssrn.3297047
[43] Liu L., Litigation risk and corporate cash holdings: The moderating effect of CEO tenure. Finance Res Lett. ,2024; 69:106211. Doi: 10.1016/j.frl.2024.106211
[44] Liu Y., Mauer DC. ,Corporate cash holdings and CEO compensation incentives, J Finance Econ. ,2011;102(1):183-98. Doi: 10.1016/j.jfineco.2011.05.008
[45] Lozano MB, Yaman S. ,The European financial crisis and firms’ cash holding policy: An analysis of the precautionary motive, Glob Policy., 2020;11(S1):84-94. Doi:10.1111/1758-5899.12768
[46] Mansouri, F. and Mohammadi, M., Investigating the Effect of Management Entrenchment on Speed of Cash Holding Adjustment in Companies Listed in Tehran Stock Exchange, Advances in Mathematical Finance and Applications, 2017, 2(4), pp.81-92. Doi:10.22034/amfa.2017.536268.
[47] Martínez-Sola C, García-Teruel PJ, Martínez-Solano P. ,Corporate cash holding and firm value. Appl Econ. ,2013;45(2):161-70. Doi:10.1080/00036846.2011.595696
[48] O’Brien JP, Folta TB. ,A transaction cost perspective on why, how, and when cash impacts firm performance, Manag Decis Econ., 2009;30(7):465-79. Doi:10.1002/mde.1462
[49] Opler T., Pinkowitz L., Stulz R., Williamson R., The determinants and implications of corporate cash holdings, J Financ Econ., 1999;52(1):3-46. Doi:10.1016/S0304-405X (99)00003-3
[50] Orlova SV., Rao RP., Cash holdings speed of adjustment, Int Rev Econ Finance, 2018;54(1):1-14. Doi: 10.1016/j.iref.2017.12.011
[51] Peni E. ,CEO and chairperson characteristics and firm performance, J Manag Gov., 2014;18(1):185-205. Doi:10.1007/s10997-012-9224-7
[52] Simsek Z., CEO tenure and organizational performance: An intervening model, Strateg Manage J. ,2007;28(6):653-662. Doi:10.1002/smj.599
[53] Stetsyuk I., Altintig A., Arin KP., Kim MS. ,CEO characteristics and risk-taking under economic policy uncertainty, J Risk Finance Manag., 2024;17(6):238. Doi:10.3390/jrfm17060238
[54] Taherinia M., The impact of investment inefficiency and cash holding on CEO turnover, Adv Math Finance Appl, 2020; Oct 1;5(4):469-78. Doi:10.22034/amfa.2020.674945.
[55] Tong Z., CEO risk incentives and corporate cash holdings, J Bus Finance Account., 2010;37(9-10):1248-80. Doi:10.1111/j.1468-5957.2010. 02208.x
[56] Tran QT., Corruption and corporate cash holdings: International evidence, J Multinatl Finance Manag. ,2020; 54:100611. Doi: 10.1016/j.mulfin.2019.100611
[57] Weidemann JF. ,A state-of-the-art review of corporate cash holding research, J Bus Econ. ,2018;88(6):765-97. Doi:10.1007/s11573-017-0882-4
[58] Yung K, Long X., CEO overconfidence and the adjustment speed of leverage and cash: Evidence on cash is not the same as negative debt, Empir Econ., 2022;63(2):1081-108. Doi:10.1007/s00181-021-02158-5
[59] Zanjirdar, M., Moslehi Araghi, M., The Impact of Changes in Uncertainty, Unexpected Earning of Each Share and Positive or Negative Forecast of Profit Per Share in Different Economic Condition, Quarterly Journal of Fiscal and Economic Policies,2016;4(13): 55-76.
[60] Nikumaram, H., Rahnamay Roodposhti, F., Zanjirdar, M., The Explanation of Risk and Expected Rate of Return By Using of Conditional Downside Capital Assets Pricing Model, Financial knowledge of securities analysis,2008;3(1):55-77
