Corporate Cash Holdings and Product Market Competition: The Effects of Stock-Based Executive Compensation

Abstract

This study explore the effects of different levels of stock-based reward incentives on the value of corporate cash holdings by the PTM developed by Hansen (1999). Empirical results revealed that the positive effects of executives’ cash holdings on corporate value increase concurrently with the sensitivity of the value of their stock-based rewards on the standard deviation of corporate stock returns. Conversely, the positive effects of executives’ cash holdings on corporate value diminish concurrently with managerial incentives. Furthermore, the excess cash in companies with strong managerial incentives positively affects corporate value. However, these effects have no substantial economic effects. Finally, the outcomes of this study can serve as a reference for companies and competent authorities when formulating reward agreements to inhibit agency problems by taking into account the positive and negative effects of reward incentives, thereby protecting shareholders’ interests and ensuring capital market stability.