Suboptimal Financial Policies and Executive Ownership in the UK: Evidence from a Pre-crisis.

Purpose – The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low
leverage and investigate how executive ownership contributes to this decision.
Design/methodology/approach – Firms following this policy are identified both by using a fixed
classification approach and the analysis of the distribution of cash and leverage. Logit analysis is then
used to estimate the probability of adopting the policy as a function of executive ownership.
Findings – Extreme financial policies are suboptimal as firms adopting these policies tend to
undershoot (overshoot) their target leverage (cash holdings) ratios. The impact of the
executive ownership on the probability of adopting this policy is U-shaped, in line with the alignment–
entrenchment hypothesis.
Practical implications – Despite the substantial presence of non-executive directors in the boards
and a significant amount of shareholdings by executive directors, the firms under analysis have adopted
suboptimal financial policies possibly because poorly governed or because executive ownership is the
range where entrenchment is feasible.
Originality/value – This is the first attempt at recognising policies of high cash and low leverage as
being explicitly interdependent. It is also the first study focussing on the UK, a country of interest,
because ownership structure is relatively dispersed. Moreover, instead of choosing fixed threshold
levels of the variable in defining the extreme financial policy, this paper proposes the analysis of the
distribution of cash holdings and leverage and accounts for target levels of cash and leverage.