Conclusion
In this study, we investigate whether CEOs with higher ability generate higher value out of cash use. Cash is an important source of internal capital that is under the control of CEOs. The decision of how to deploy cash is at the discretion of management (Liu & Mauer, 2011). Thus, the value of cash differs depending on how CEOs use it, its availability, and the cost of external financing (e.g., Fazzari et al., 1988; Jensen, 1986; Myers & Majluf, 1984; Pinkowitz & Williamson, 2004). Moreover, managerial ability is positively associated with efficient investment decisions and firm performance (e.g., Baik et al., 2011; Banker et al., 2013; Carter et al., 2010; Chang et al., 2010; Goodman et al., 2013; Harris & Holmstrom, 1982; Jian & Lee, 2011; Rajgopal et al., 2006; Trueman, 1986). Thus, we argue that the marginal value of cash can vary across different levels of CEO managerial ability. In other words, the market will place a higher value on cash if the firm hires a high-ability CEO who manages the cash well. Using the managerial ability measures developed by Demerjian et al. (2012), we find that CEO managerial ability significantly increases the marginal value of cash. We also find that the impact of managerial ability on the marginal value of cash is greater for firms that are especially financially constrained. In addition, our results show that the positive impact of managerial ability on the marginal cash value is more evident for firms with higher levels of free cash flows and less entrenched management. Overall, our study provides a fresh perspective by showing that the market reacts more favorably to a firm's cash holdings if the cash is managed by a more able CEO, and thus that shareholders consider the ability of a CEO when they evaluate cash.
