Cash Holdings Adjustment Speed and Managerial Ability

Using the partial adjustment model of cash holding, we find that managerial ability is negatively related to adjustment speed of cash holdings toward the target, particularly when the firm has excess cash. We also find that the relation between managerial ability and cash holding adjustment speed is weaker in the presence of the internal capital market. Additionally, we provide evidence that firms with higher managerial ability are less likely to make inefficient investments when they have excess cash, implying that high‐ability managers are willing to hold a large amount of cash to make timely investments.