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1. Introduction
In the business environment nowadays, cash plays a prominent role for firms in achieving a significant competitive advantage over their rivals (Ma et al., 2020). An extensive strand of literature has widely investigated the cash management theoretical framework (e.g. Chen et al., 2020). Previous evidence suggests that firm managers hold higher cash levels mainly due to transactive, precautionary, agency, tax and predation risk causes (Amess et al., 2015; Gaio et al., 2022). Although holding cash can be beneficial for firms, it might conceal an opportunity cost related to long-term returns of missed investment opportunities (Jensen, 1986). Thus, the higher demand for increased cash positions at the firm level highlights the necessity of CEO decision-making in relation to managerial discretion levels. Particularly in conditions of ambiguity and intense competition, managerial discretion has a significant impact on decision-making at the firm level, such as investment and funding decisions (Magerakis and Tzelepis, 2020). However, existing literature has not yet addressed whether the impact of managerial ability on corporate cash policy, if any, systematically varies with the degree of managerial discretion. Therefore, we attempt to fill a considerable gap in the literature and advance published research (e.g. Guo and Ding, 2020; Nobre et al., 2018) by investigating whether more able CEOs hold more cash from the perspective of managerial discretion.
We are motivated to examine the role of CEO ability–discretion nexus on firm-level cash holding for several reasons. First, previous studies show that when making financing decisions in determining their financial flexibility, firms must consider their cash holding levels. Due to its nature that allows easy conversion with minimum transaction fees, cash stimulates business activity and managerial decision-making. Therefore, the most liquid asset in a firm's balance sheet, cash, provides higher financial flexibility for decision-making (Florackis and Sainani, 2018). Second, empirical evidence asserts that the proportion of cash to total assets for a typical US firm has increased significantly for the last three decades and is mainly attributed to changes in firm characteristics (Bates et al., 2009; Clarkson et al., 2020). Hence, the continuous rise in corporate cash levels provides additional motivation to estimate the combined effects of managerial characteristics and discretion. Finally, in the presence of financial frictions, the...