Two Essays on Cash Holdings

Corporate cash holdings have a significantly positive impact on executive compensation, distinct from the well-documented relation between performance and compensation. An increase of cash holdings by 10% of assets corresponds to about $2.7 million additional CEO total compensation. This relation is driven primarily by discretionary compensation components such as bonus and option-based compensation. In companies with weaker governance, the relation between cash holdings and executive compensation is even stronger. Using awards and losses associated with corporate litigation as exogenous shocks to the firms' cash, I show that CEO compensation readily responds to these changes in cash holdings. Prior studies postulate that the optimal level of firms' cash holding is dynamic and, thereby, managers should actively adjust cash holdings. I find that the more volatile a firm's cash holdings, the higher its firm value. The correlation is more pronounced in smaller firms, younger firms, and firms in high tech industries. The findings are robust when controlling for the level of cash holdings and cash flow volatility, among other factors. The positive connection between cash holdings volatility and firm value is consistent with the need for active management of cash. Specialized managers who actively adjust the amount of cash holdings help enhance the firm value more than generalist managers, consistent with the idea that specialized management has a better understanding of the firm's cash needs.