Cash and Corporate Control

  • Author(s): OLUBUNMI FALEYE
  • Published: Nov 27, 2005
  • Pages: 2041-2060
  • DOI: 10.1111/j.1540-6261.2004.00691.x


The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings. However, recent studies report contradictory evidence. I focus on the takeover‚Äźdeterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase, while cash holdings significantly decline.

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