Managerial Ability and Marginal Value of the Cash

Abstract

Cash is considered as the most important internal source of any firm under its management’ control. The marginal value of cash is influenced by management ability. The purpose of the present study is to investigate the relationship between managerial ability and its impact on the marginal value of cash. In this regard, information of 176 firms listed on the Tehran Stock Exchange during the period of 2012-2018 was studied. Managerial ability is measured according to the model of Demirjian et al. (2012). Also, Abnormal share returns and the Capital Asset Pricing Model (CAPM) is used to measure marginal value of cash. The main econometric methods of the research are multiple regression (with robust standard error, plus industry and year fixed effects) as well as a clustering method. The main results of the study show that the managerial ability has a significant positive association with marginal value of cash. In other words, marginal value of cash is higher for firms that hire capable managers, because they make better use of available financial resources, including cash, and greater returns for the firms.

Keywords

• managerial ability
• marginal value of cash
• abnormal share return