Corporate Governance and Firm’s Cash Holdings: Evidence From India

Abstract

This paper investigates the empirical determinants of corporate cash holdings for Indian firms. A sample of 1540 unique non finance and non utility Indian firms, with positive assets and positive sales, listed on the National Stock Exchange for a period of 11 years, (from 2001-2011) is selected. We study cash holdings in family business companies, foreign origin companies, Government companies, Private companies and in Group companies. We focus on the effect of ownership structure on firm governance. Corporate governance theories suggest that firms with high levels of concentrated ownership are subject to greater extraction of private benefits from cash holdings. We present evidence of a significant relation between promoter’s ownership and cash holdings. Results reveal that Indian firms with high level of family ownership and group companies have low cash holdings whereas Government companies, Private companies and Foreign origin companies have larger cash holdings suggesting more opportunities for private benefits extraction. The findings of this paper show that corporate cash holding is influenced by market to book ratio, net leverage, net working capital, size, R&D to sales, ROA, and capital expenditure to assets. Dividend dummy and cash flow volatility are found not significant.