Banking Relationships, Managerial Incentives, Board Monitoring and Corporate Cash Holdings: An Emerging Market Perspective

Review of Quantitative Finance and Accounting, volume 44, pages 353–378. (2015)

Posted: 5 May 2020

See all articles by Hai-Chin Yu

Hai-Chin Yu

Chung Yuan Christian University

Ben J. Sopranzetti

Rutgers Business School: Newark and New Brunswick

Cheng-Few Lee

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics

Date Written: April 9, 2015

Abstract

This paper uses Taiwanese data to examine the impact of firm-level corporate governance mechanisms on firms’ average cash holdings. Specifically, it examines how a firm’s number of banking relationships and the percentages of managerial ownership and board ownership impact the firm’s level of cash holdings. We document that higher percentages of managerial ownership and board ownership are associated with higher levels of corporate cash holding. Our results are consistent with the notion that managerial incentives and board monitoring are substitutes for each other. The substitution effect is especially pronounced when firms have poorly incentivized managers. We find that firms with a larger number of banking relationships are associated with lower levels of cash holdings. We find no evidence of a bank monitoring free-rider problem. We also document a life-cycle effect in the drivers of cash holdings: there are substantial differences in the drivers of cash holdings for firms that have been in business for more than 5 years relative to those that have not been in business less than 5 years.

Keywords: Bank monitoring, Managerial ownership, Banking relationship, Corporate governance, Cash holdings

JEL Classification: G32, G34, G30, G31

Suggested Citation

Yu, Hai-Chin and Sopranzetti, Ben J. and Lee, Cheng-Few, Banking Relationships, Managerial Incentives, Board Monitoring and Corporate Cash Holdings: An Emerging Market Perspective (April 9, 2015). Review of Quantitative Finance and Accounting, volume 44, pages 353–378. (2015), Available at SSRN: https://ssrn.com/abstract=3571945

Hai-Chin Yu

Chung Yuan Christian University ( email )

22 Pu-Jen,Pu-chung Li
Chung-Li, Taiwan 32023
Taiwan
886 3 265 5209 (Phone)
886 3 265 5299 (Fax)

Ben J. Sopranzetti (Contact Author)

Rutgers Business School: Newark and New Brunswick ( email )

100 Rockafeller Rd
Piscataway, NJ 08854
United States

Cheng-Few Lee

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Avenue
Newark, NJ 07102
United States
732-445-3907 (Phone)
732-445-5927 (Fax)

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