Executive Summary : | This project aims to investigate the impact of the managerial ability of the CEO on the corporate cash holding of Indian firms. The hypothesis is that firms with high-ability managers hold more cash to finance future investments and meet growing demand, which is not motivated by expropriation incentive and is valued positively in the market. The managerial ability will be calculated using the two-step method of Demerjian, Lev, and McVay (2012). The first step involves determining the firm-level efficiency within an industry using data envelopment analysis. The second step calculates managerial efficiency by regressing firm-level efficiency on firm-specific efficiency drivers like firm size, life cycle, market share, free cash flow, operational diversity, and geographical diversity. To estimate the causal effect of managerial ability on firm cash holding, a fixed effect panel model will be estimated by regressing the firm's cash holding on managerial ability and other control variables. The market reaction of firms will be studied using the Faukander and Wang model, which determines the market value of Rs. 1 unit of cash held by a firm. The hypothesis will be tested on a sample of firms listed in the Indian stock exchange between 2005 and 2020. |