Does executive ownership lead to excess target cash? The case of UK firms

Purpose – The aim of this paper is to investigate the dynamics between executive ownership and
excess cash policy in the UK.
Design/methodology/approach – The authors identify firms adopting an excess policy using a joint
criterion of high cash and cash higher than the target. Logit analysis is used to estimate the impact of
executive ownership and other governance characteristics on the probability of adopting an excess
cash policy.
Findings – The results suggest that, in the UK, the impact of the executive ownership on the probability
of adopting an excess cash policy is non-monotonic, in line with the alignment-entrenchment
hypothesis. The results are robust to different definitions of excess cash policy, to alternative
specifications of the regression model, to different estimation frameworks and to alternative proxies of
ownership concentration.
Research limitations/implications – The authors’ approach provides a new measure of the excess
target cash for the firm. They show the need to identify an excess target cash policy not only by using
an empirical criterion and a theoretical target level of cash, but also by capturing persistence in
deviation from the target cash level. The authors’ measure of excess target cash calls into questions
findings from previous studies. The authors’ approach can be used to explore whether excess cash
holdings of UK firms and the impact of managerial ownership have changed from before the crisis to
after the crisis.
Practical implications – The authors’ measure of excess target cash allows identifying in practice
levels of cash which are abnormal with respect to an equilibrium level. UK firms should be cautious in
using executive ownership as a corporate governance mechanism, as this may generate suboptimal
cash holdings and suboptimal firm value. Excess cash policy might be driven not only by a poor
corporate governance system, but also by the interplay between agency costs of managerial
opportunism and cost of the external finance which further research could explore.
Originality/value – Actually, “how much cash is too much” is a question that has not been addressed
by the literature. The authors address this question. Also, this amount of cash allows the authors to study
the extent to which executive ownership contributes to explain the out-of-equilibrium persistency in the
cash level.