Distracted institutional shareholders and corporate cash holdings

Adrian (Wai Kong) Cheung*, Mostafa Monzur Hasan, Joye Khoo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

We investigate whether institutional investors’ distraction affects corporate cash holdings. We also investigate two channels that may explain the relationship (if any) between institutional shareholder distraction and corporate cash holdings. First, the acquisition channel predicts that a reduction of monitoring intensity allows the firm to engage in costly and value-destroying acquisitions and this, in turn, lowers cash holdings. Second, the payout channel suggests that firms with distracted shareholders are associated with dividend cuts, and therefore, shareholder-distraction-related payout cuts may leave the firm with more cash holdings. Using 26,727 firm-year observations (3813 unique firms) over the period 1980 to 2010, we find evidence that institutional shareholder distraction is negatively associated with corporate cash holdings. We also find that this effect is driven mainly by the acquisitions channel. The evidence is robust to an alternative estimation method and alternative measures of key variables.

Original languageEnglish
Pages (from-to)453-466
Number of pages14
JournalInternational Review of Economics and Finance
Volume71
Early online date1 Sep 2020
DOIs
Publication statusPublished - 1 Jan 2021

Keywords

  • Acquisitions
  • Cash holdings
  • Distracted shareholders
  • Total payout

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