July 2, 2023 by
Abstract of the presentation
Founder CEOs differ from non-founder CEOs as they aim for a founder-centric firm where founders retain significant decision-making flexibility. Given that cash affords considerable flexibility to managers, we test and find that firms with founder CEOs hold more cash than their counterparts. The preference for flexibility results in lower debt choice and lower substitution of debt to cash, even when their firms experience higher borrowing flexibility. During the ‘debt preference era’ when average firms reduce cash holdings, founder CEOs do not. Founder CEOs’ preference for cash holding is independent of potential external financing difficulties. They accumulate cash by following a conservative payout policy and saving more cash from operating cash flows and equity issuance but not from debt issuance. Cash reserve by founder CEOs generates firm value, and the announcement return is positive for cash-based mergers and acquisitions (M&A) by founder CEOs.