Tournament-Based Incentives, Corporate Cash Holdings, and the Value of Cash

This research examines the relationships between tournament-based incentives and corporate cash holdings and the value of cash. We find robust evidence that tournament-based incentives are positively related to cash holdings and the value of cash. Moreover, the effect of tournament-based incentives on the value of cash is stronger for financially constrained firms. Our evidence indicates that, as tournament-based incentives motivate riskier corporate policy choices that lead to not only larger expected shareholder value but also greater cash flow uncertainty, firms increase cash holdings to cushion potential liquidity shortfalls that may cause underinvestment.