The impact of ownership characteristics on persistent high-cash and low-leverage policies: Evidence from UK firms

This paper investigates the characteristics of firms that adopt persistent conservative financial policies. We are mainly interested in the determinants of the likelihood of firms adopting the persistent policies of low-leverage and high-cash holdings simultaneously. In this paper, we classify firms as financially conservative if they adopt both low-leverage and high-cash policies at the same time. Using a large sample of non-financial UK firms over the period 1984 to 2001, we document that managerial ownership, board composition, and ownership concentration are important governance determinants of the likelihood of firms adopting conservative financial policies. Additionally, we observe that the impact of managerial ownership is non-linear, which suggests that managerial incentives toward conservative cash and leverage policies depend on ownership levels of managers. Finally, we provide evidence that conservative firms tend to undershoot (overshoot) their target leverage (cash holdings) ratios.