Ex-post Bargaining, Corporate Cash Holdings, and Executive Compensation

Abstract

Although compensation contracts rarely include cash holdings as a factor, we show that high cash holdings can be used by executives in the ex post bargaining over compensation. An increase of cash holdings by 10% of assets corresponds to about $2.7 million in additional CEO total compensation. In companies with weaker governance, the relation is even stronger. Using awards and losses associated with corporate litigation as exogenous shocks to the firms’ cash, we show that CEO compensation readily responds to these changes in cash holdings, confirming that managers are able to derive personal benefits from excess cash holdings.

Keywords: corporate cash holdings, executive compensation

JEL Classification: G34