Stakeholder-centric corporate misconduct and financing policies: A precautionary tale

We investigate how stakeholder-centric corporate misconduct (CM) influences firms’ financial policies. CM is associated with higher cash holdings and lower dividend payouts and debt financing. These effects are more pronounced in firms with stronger governance. We further show that high cash holdings in CM firms are associated with higher firm value and lower implied cost of capital. Firms that replace their CEOs following CM adopt more conservative financial policies. Our evidence supports the precautionary motive for cash holdings, indicating that such reserves are unlikely to result from agency conflicts or increased managerial discretion in CM firms.