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We model a firm's demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm's propensity to save cash out of cash f lows (the cash flow sensitivity of cash).We hypothesize that constrained firms should have a positive cash f low sensitivity of cash, while unconstrained firms' cash savings should not be systematically related to cash f lows. We empirically estimate the cash f low sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory.

We argue in this paper that executives can only impact firm outcomes if they have influence over crucial decisions. Based on this idea we develop and test a hypothesis about how CEOs' power to influence decisions will affect firm performance: since managers' opinions may differ, firms whose CEOs have more decision-making power should experience more variability in firm performance. Thus performance depends on the interaction between executive characteristics and organizational variables. By focusing on this interaction we are able to use firm-level characteristics to test predictions that are related to unobservable managerial characteristics. Using such firmlevel characteristics of the Executive Office we develop a proxy for the CEO's power to influence decisions and provide evidence consistent with our hypothesis. Firm performance (measured by Tobin's Q, stock returns and ROA) is significantly more variable for firms with greater values of our proxy for CEO influence power. The results are robust across various tests designed to detect differences in variability.

When firms are able to pledge their assets as collateral, investment and borrowing become endogenous: pledgeable assets support more borrowings that in turn allow for further investment in pledgeable assets. We show that this credit multiplier has an important impact on investment when firms face credit constraints: investment-cash flow sensitivities are increasing in the degree of tangibility of constrained firms' assets. If firms are unconstrained, however, investment-cash flow sensitivities are unaffected by asset tangibility. Crucially, asset tangibility itself may determine whether a firm faces credit constraints -firms with more tangible assets may have greater access to external funds. This implies that the relationship between capital spending and cash flows is nonmonotonic in the firm's asset tangibility. Our theory allows us to use a differences-in-differences approach to identify the effect of financing frictions on corporate investment: we compare the differential effect of asset tangibility on the sensitivity of investment to cash flow across different regimes of financial constraints. We implement this testing strategy on a large sample of manufacturing firms drawn from COMPUSTAT between 1985 and 2000. Our tests allow for the endogeneity of the firm's credit status, with asset tangibility influencing whether a firm is classified as credit constrained or unconstrained in a switching regression framework. The data strongly support our hypothesis about the role of asset tangibility on corporate investment under financial constraints.

We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows constrained firms to hedge against future cash flow shortfalls, reducing current debt -"saving borrowing capacity" -is a more effective way of securing investment in high cash flow states. This trade-off implies that constrained firms will allocate cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). Those same firms, however, will use free cash flows to reduce current debt if their hedging needs are low. The empirical examination of debt and cash policies of a large sample of firms reveals evidence that is consistent with our theory. In particular, our evidence shows that financially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows while leaving their debt positions unchanged. In contrast, constrained firms with low hedging needs direct most of their free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt.Key words: Cash holdings, debt policies, hedging, financing constraints, risk management JEL classification: G31 *We thank Yakov Amihud, Patrick Bolton, Julian Franks, Mitch Petersen, and Henri Servaes for their comments and suggestions. We also received valuable comments from seminar participants at Columbia University, Duke University, London Business School, Northwestern University, and the University of Washington at St. Louis. The usual disclaimer applies. Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies AbstractWe model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows constrained firms to hedge against future cash flow shortfalls, reducing current debt -"saving borrowing capacity" -is a more effective way of securing investment in high cash flow states. This trade-off implies that constrained firms will allocate cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). Those same firms, however, will use free cash flows to reduce current debt if their hedging needs are low. The empirical examination of debt and cash policies of a large sample of firms reveals evidence that is consistent with our theory. In particular, our evidence shows that financially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows while leaving their debt positions unchanged. In contrast, constrained firms with low hedging needs direct most of their free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It s...

We provide a rationale for pyramidal ownership (the control of a …rm through a chain of ownership relations) that departs from the traditional argument that pyramids arise to separate cash ‡ow from voting rights. With a pyramidal structure, a family uses a …rm it already controls to set up a new …rm. This structure allows the family to 1) access the entire stock of retained earnings of the original …rm, and 2) to share the new …rm's non-diverted payo¤ with minority shareholders of the original …rm. Thus, pyramids are attractive if external funds are costlier than internal funds, and if the family is expected to divert a large fraction of the new …rm's payo¤; conditions that hold in an environment with poor investor protection. The model can di¤erentiate between pyramids and dual-class shares even in situations in which the same deviation from one share-one vote can be achieved with either method. Unlike the traditional argument, our model is consistent with recent empirical evidence that some pyramidal …rms are associated with small deviations between ownership and control. We also analyze the creation of business groups (a collection of multiple …rms under the control of a single family) and …nd that, when they arise, they are likely to adopt a pyramidal ownership structure. Other predictions of the model are consistent with systematic and anecdotal evidence on pyramidal business groups.

We thank Jaehoon Lee for excellent research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

While previous empirical literature has examined the effect of founder-CEOs on firm performance , it has largely ignored the effect of firm performance on founder-CEO status. In this paper, we use instrumental variables methods to better understand the relationship between founder-CEOs and performance. Using the proportion of the firm's founders that are dead and the number of people who founded the company as instruments for founder-CEO status, we find strong evidence that founder-CEO status is endogenous in performance regressions. After instrumenting for founder-CEO status, we identify a positive causal effect of founder-CEOs on firm performance which is quantitatively larger than the effect estimated through standard OLS regressions. Contrary to the common perception that founder-CEOs will retain their titles following good performance, we show that performance is negatively related to the likelihood that founders retain the CEO title. This result appears to be driven primarily by founder departures after periods of good performance, rather than by an entrenchment effect that allows founders to remain as CEOs following poor performance. We provide several potential explanations for this new finding. Abstract While previous empirical literature has examined the effect of founder-CEOs on firm performance , it has largely ignored the effect of firm performance on founder-CEO status. In this paper, we use instrumental variables methods to better understand the relationship between founder-CEOs and performance. Using the proportion of the firm's founders that are dead and the number of people who founded the company as instruments for founder-CEO status, we find strong evidence that founder-CEO status is endogenous in performance regressions. After instrumenting for founder-CEO status, we identify a positive causal effect of founder-CEOs on firm performance which is quantitatively larger than the effect estimated through standard OLS regressions. Contrary to the common perception that founder-CEOs will retain their titles following good performance, we show that performance is negatively related to the likelihood that founders retain the CEO title. This result appears to be driven primarily by founder departures after periods of good performance, rather than by an entrenchment effect that allows founders to remain as CEOs following poor performance. We provide several potential explanations for this new finding.