Cash Holdings, Corporate Governance and Financial Constraints
32 Pages Posted: 30 Sep 2012
Date Written: September 30, 2012
We examine the relation between cash holdings, corporate governance and financial constraints. We find that firms with weak shareholder rights hold less cash, in contrast to the predictions of agency theory. This result is partly due to the positive correlation that exists between shareholder rights measures and the degree of financial constraint faced by the firm. We show that control enhancing mechanisms reduce cash holdings of financially constrained firms. Control/ownership deviation gives these firms extra flexibility, enabling them to issue shares without blockholders losing control, and provides an alternative to high cash holdings.
Keywords: cash holdings, financial constraints, governance, cash flow rights, voting rights, family firms
JEL Classification: G32, G35
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