CEO rolodex and the value of excess cash holding: Evidence from Korea

Abstract

This paper examines whether a CEO's social connections to directors outside the firm, referred to as CEO rolodex, affect the value of excess cash holding. Using a large sample from Korea, we find that firms led by CEOs with extensive rolodex tend to have lower values of their excess cash holdings compared to those with smaller rolodex. This effect is more salient for firms with poor governance grades, less-independent boards, less-aligned boards (or CEOs) with shareholders' wealth, lower majority ownership, financially constrained firms, and those that do not pay dividends. However, we do not find strong evidence that CEO rolodex directly influences a firm's overall cash holding. Additionally, the negative impact of CEO rolodex on the value of excess cash becomes insignificant during certain periods, such as the crisis and the pandemic, when a firm's cash reserves may be more important, resulting in lower agency costs from excess cash than in ordinary periods. Overall, this paper suggests that CEOs with extensive social capital exacerbate agency costs related to their firm's excess cash holding.