The Determinants and Marginal Value of Corporate Cash Holdings: Financial Constraints versus Corporate Governance

Abstract

This article compares the influence of financial constraint and corporate governance on corporate cash holdings of publicly traded U.S. firms in the 1990-2006 periods. We find that firms with good governance hold more cash than firms with poor governance regardless of their financial constraints. Further, we find that cash holdings of financially constrained firms with good corporate governance are the highest. The impact of corporate governance on firm value is strong only when firms are financially constrained. Our results indicate that financial constraint is a more important determinant than corporate governance for corporate cash holdings.

Keywords: Corporate Cash Holdings, Corporate Governance, Financial Constraints

JEL Classification: G30, G32, G34