The Impact Of Executive Equity Incentive Plan And Contract Characteristics On Cash Holdings

Cash is of significance for corporate finance. Cash holdings influence corporate operating efficiency directly. If the level of cash holdings is too low, it would be difficult for enterprises to grasp investment opportunities and to raise sufficient fund when financial constraint happened. In contrast, too much cash holdings lead to agency problem. Recently, the phenomenon of excessive cash prevails at home and abroad, which makes cash holdings a hot issue. If normal level of cash holdings can improve corporate value, then agency theory would be more suitable for explaining excessive cash or cash holdings after eliminating investment opportunities and financial constraint. If so, whether equity incentive plan which aims to resolve principal-agent problem can restrain excessive cash holdings? What would be possible functional route?This paper elucidates the functioning mechanism of executive equity incentive plan and contract characteristics on cash holdings based on agency theory. By using balanced panel data of Shanghai and Shenzhen A-share listed companies from 2009 to 2013, this paper conducts econometric analysis and draws some conclusions. Equity incentive plan has reducing effect on corporate cash holdings, on excess cash holdings in particular. Stock option, exercising constraints and constant incentive embedded in the equity incentive plan have reinforcement effect, however period of validity and incentive intensity do not have. The reducing effect of equity incentive plan on cash holdings for low investment opportunities and low financial constraint companies is more prominent. The paths by which equity incentive influences cash holdings are mainly to restrain increasing effect of over-investment and over-perquisite. The contributions lie in elaborating theoretical hypotheses of cash holdings, revealing the effects of equity incentive on cash holdings under different circumstances, expounding the differences of characteristics and influence inside equity incentive contract and examining functional paths of the effect of equity incentive on cash holdings by restraining agency behaviors. Cash holdings decision has many agency problems in Chinese listed companies and equity incentive plan does play a significant role. This paper provides reference for corporate cash management and executive equity incentive contract designing.