The Effect Of Executive Compensation Performance Sensitivity On Corporate Cash Holdings

As an important asset,cash plays a significant role in the daily operations in a company.There are two reasons why the amount of cash is important.Firstly,because of the strongest liquidity and the smallest risk of value of cash,the appropriate cash holdings can guarantee the company's current expense,which ensures the daily operation of the enterprise.At the same time,when facing external financing constraints,the company with abundant cash holdings can prevent itself from being charged with the costs asked by the creditors,so that it can grasp more investment opportunities.Secondly,although cash holdings bring benefits,it will also bring some cost to the company.As a low-yielding asset,cash has opportunity cost.What's more,holding too much cash triggers principal-agent problems,producing the agency cost.Based on the convenience and inevitable corresponding cost mentioned above,reasonable cash holding is important.This paper mainly exams the effect of the compensation-performance sensitivity of senior executives on corporate cash holdings.Usually,firm is controlled by the managements instead of ownerships.In this playground,it is possible that the managements seek theirs' own interests,which damaging the interests of ownerships.Then the principal-agent problem appears.In order to ease the principal-agent problem,companies take account of performance-based compensation,which improves the sensitivity between compensation and performance.So,executives' rent-seeking is inhibited.The introduction of compensation incentives reduces conflicts of interest between owners and operators,which reduces the operators' risk aversion.But it leads to the divergence between owners and creditors.In the background of the conflict between owners and operators and the conflict between owners and creditors,through analyzing the behavior of cash holdings of companies,we can explore the effect of pay-performance sensitivity on the amount and value of cash holdings.Then we further analyze the deep reason of companies' cash policy and raise suggestions.In the empirical research,we analyze the 9720 data of china's A-share listed companies during 2006 and 2015.Then we analyze the effect of the pay-performance sensitivity on the amount and value of cash holdings.We further analyze the effect of the policy of the limit of the pay of senior executives on cash holdings of companies as well as the path of the effect,based on DID model.The following results are tested.Firstly,the compensation-performancesensitivity of senior executives decreases cash holdings,while it increases the value of cash holdings.The stronger the compensation-performance sensitivity of senior executives,companies tend to hold less cash,but the cash holding increases the value of the company.Secondly,the policy of the limit of the pay of senior executives increased cash holdings,while the cash holdings tend to reduce the value of the corporate.Finally,the impact of the policy of the limit of the pay of senior executives during 2009 on cash holdings primarily through its' influence on the payperformance sensitivity.