Corporate Governance and Firm Cash Holdings
Preprint
- 28 August 2006
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
We examine the relation between the management of cash holdings and corporate governance. We find that firms with weaker corporate governance have smaller cash reserves. Further tests suggest that these firms dissipate their cash reserves more quickly than do managers of firms with stronger governance, and that rather than investing internally, they spend the cash primarily on acquisitions. The investment of cash by weakly governed managers reduces future profitability, an effect that is priced into those firms' stocks. We conclude that self-interested managers choose to spend cash quickly rather than gain flexibility through stockpiling it. This suggests that the expected discipline costs of visibly accumulating excess cash reserves are high. Our results, which contrast with recent research on the cross-country relation between shareholder rights and cash holdings, help explain how country level shareholder rights interact with firm-level agency problems and shareholder power.Keywords
This publication has 13 references indexed in Scilit:
- The determinants of corporate board size and composition: An empirical analysisJournal of Financial Economics, 2007
- Overinvestment, Corporate Governance, and Dividend InitiationsSSRN Electronic Journal, 2007
- The costs of entrenched boardsJournal of Financial Economics, 2005
- Payout policy in the 21st centuryJournal of Financial Economics, 2005
- Estimating Standard Errors in Finance Panel Data Sets: Comparing ApproachesPublished by National Bureau of Economic Research ,2005
- What Matters in Corporate Governance?SSRN Electronic Journal, 2004
- The Cash Flow Sensitivity of CashThe Journal of Finance, 2004
- Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash?Published by National Bureau of Economic Research ,2003
- CEO compensation and bank mergersJournal of Financial Economics, 2001
- The Determinants and Implications of Corporate Cash HoldingsPublished by National Bureau of Economic Research ,1997