Excess Cash Holdings,Managerial Discretion And Investment Distortion

Investment distortion is defined as actual investment expenditure deviate from that required to finance expected investments.The existing research explains it based on the agency theory that managers would squander excess cash holdings to investment distortion for their personal gain.So investment distortion will do harm to firms' development.And existing research argue that only strengthening monitoring can reduces distortions.Be different from the former study,this paper analyzes the cause of investment distortion on the basis of financial flexibility theory.The main idea of financial flexibility theory is that holding financial flexibility is the first-order determinant of financial decisions and every decision is an intertemporal decision not a "one time decision".Excess cash holdings are one resource of financial flexibility.When excess cash holdings are used for investment,managers must be concerned about how to keep financial flexibility.Hence it's worth to examine whether the more excess cash holdings the more investment distortion there would be.Given managers' leading role on the use of excess cash holdings,this paper introduces managerial discretion as a key moderating variable and analyzes the correlation between excess cash holdings and investment distortion from the perspective of financial flexibility.Then it examines whether the effect of managerial discretion on that correlation would be different on the context of financial constraints and spare debt capacity.Beginning from the carding and review of financial flexibility and managerial discretion,this paper develops hypotheses through theoretical analysis and examine by data of Chinese listed firms empirically.The main conclusions are as follows.Firstly,there is a positive correlation between excess cash holdings and investment distortion on the whole.And irrespective of other factors,there's a strong positive correlation between excess cash holdings and investment distortion when managerial discretion is higher.Otherwise,there's no significant correlation between excess cash holdings and investment distortion when managerial discretion is lower.Secondly,financial constrains make the correlation between exeess eash holdings and investment distortion more positive than the overall sample.And there no correlation between them without financial constraints.What's more,compared with lower managerial discretion,higher managerial discretion makes the correlation more positive than the overall sample when firms face more tight financial constraints.And managerial discretion has no influence on that correlation when firms face no financial constraints.Thirdly,spare debt capacity makes the correlation between excess cash holdings and investment distortion more positive than the overall sample.And there's no correlation between them without spare debt capacity.Whafs more,compared with lower managerial discretion,higher managerial discretion makes the correlation more positive than the overall sample when firms have spare debt capacity.And managerial discretion has no influence on that correlation when firms have no spare debt capacity.Above all,these conclusions indicate that the correlation between excess cash holdings and investment distortion will be not always positive as explained by agency theory when considering the different contexts and managerial discretion as a key moderating variable.Financial flexibility theory can give this phenomenon a better reasonable explanation.And managers' key role cannot be ignored in the process of geting,keeping and using financial flexibility.