Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

We analyze whether board structure and director independence in closed-end investment companies are related to shareholder interests in ways that are consistent with boards being effective monitors. We report that funds with relatively low expense ratios, one measure of board effectiveness, have smaller boards, a higher proportion of board members who are legally considered independent, relatively low director compensation, and charter provisions that specify remedial action if discounts become large. Evidence from our analysis of major fund restructuring decisions, including share repurchases, open-ending proposals and right offerings, is largely consistent with the expense ratio analysis. Overall, board characteristics that we identify with effective board independence are associated with lower expense ratios and value-enhancing restructurings.