Corporate managers generally don’t disgorge cash unless they are forced to do so. In 1988, the 1,000 largest firms generated total funds of $1.6 trillion. Yet they distributed only $108 billion as dividends and another $51 billion through stock repurchases.23 A. What are the incentives for managers to retain excessive cash balances in lieu of payment to shareholders?

B. In what way do high debt levels resolve the agency cost of free cash flow?

C. ‘Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a pillow, debt a sword.’ Interpret the meaning of this quotation.