The Effect Of Executive Compensation Incentive On Companies' Excess Cash Holdings

Cash is vital,but most vulnerable to manipulation and control.Appropriate cash holdings can increase its utilization efficiency.However,excess cash holdings may decrease shareholder value.Especially due to the asymmetry information in modern corporations,agent problems can cause power abuse of executives,thus damaging the interests of stockholders.Executive compensation incentive as an important mechanism to solve agent problems,its effect has been questioned in practice.Based on theories of cash holdings and executive compensation incentive,this paper in line with agent theory and practical problems studied the influence of executive monetary compensation and equity incentive on excess cash holdings.The paper put forward some assumptions first and then made an empirical study.The paper also compared the incentive effect of executive monetary compensation and equity incentive.Besides,aiming at providing theoretical references about developing reasonable cash holdings strategies and remuneration incentive methods,the paper introduced financing constraint variable for further analysis.The main conclusions are as follows:(1)Executive monetary compensation has significant negative correlation with excess cash holdings.(2)Executive equity incentive also has significant negative correlation with excess cash holdings.(3)Compared with low financing constraints companies,executive monetary compensation and equity incentive reduce excess cash holdings more obviously in high financing constraints companies.(4)Compared with equity incentive,monetary compensation has more significant negative correlation with excess cash holdings in negative excess cash holdings' companies and high financing constraints companies,but there is no obvious difference in other cases.Therefore,this paper puts forward that decision makers should choose appropriate compensation incentive methods according to different situations and should combine with compensation incentive policy to make cash holdings decisions.