We examine the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance the alignment of manager and shareholder interests could influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and, therefore, require greater liquidity.

We examine interactions between flexible financing and investment decisions in a model with stockholder–bondholder conflicts over investment policy. We find that financial flexibility encourages the choice of short-term debt thereby dramatically reducing the agency costs of under- and overinvestment. However, the reduction in agency costs may not encourage the firm to increase leverage, since the firm's initial debt level choice depends on the type of growth options in its investment opportunity set. The model has a number of testable predictions for the joint choice of leverage and maturity, and how these choices interact with a firm's growth opportunities.

We construct a measure of the pairwise relatedness of firms’ human capital to examine whether human capital relatedness is a key factor in mergers and acquisitions. We find that mergers are more likely and merger returns and postmerger performance are higher when firms have related human capital. These relations are stronger or only present in acquisitions where the merging firms do not operate in the same industries or product markets. Reductions in employment and wages following mergers with high human capital relatedness suggest that the merged firm has greater ability to layoff low quality and/or duplicate employees and reduce labor costs. We further show in a falsification test that human capital relatedness has no effect on acquiring firm returns in asset sales when little or no labor is transferred, which helps validate our measure of human capital relatedness.