Internal Controls, Risk Management, and Cash Holdings

Posted: 26 Aug 2020

See all articles by Hanwen Chen

Hanwen Chen

University of International Business and Economics

Daoguang Yang

University of International Business and Economics (UIBE)-Business School

Joseph H. Zhang

University of Memphis

Haiyan Zhou

University of Texas - Pan American

Date Written: August 20, 2017

Abstract

Exploiting a unique setting in China where internal controls are intended to manage risks, we investigate how internal controls shape the cash holding policies. Results show that firms with higher internal control quality (ICQ) are less likely to have abnormal cash holdings, either excess or deficit cash, and this effect is not driven by corporate governance quality. We also find that firms with higher ICQ are more likely to increase dividend payments and are less likely to increase M&A investments, especially when the firms have had a negative experience with prior M&A investments. Furthermore, our tests on the market valuation of cash holdings show that investors place a higher value on cash holdings of firms with higher ICQ. Collectively, our findings suggest that internal controls help companies shape reasonable cash policies that lead to value creation.

Keywords: Internal Controls, Risk Management, Cash Holdings, Corporate Spending

JEL Classification: G30; G38; M48

Suggested Citation

Chen, Hanwen and Yang, Daoguang and Zhang, Joseph H. and Zhou, Haiyan, Internal Controls, Risk Management, and Cash Holdings (August 20, 2017). Journal of Corporate Finance, Vol. 64, 2020, Available at SSRN: https://ssrn.com/abstract=3656270

Hanwen Chen

University of International Business and Economics ( email )

10# Huixin East Street,Chaoyang District
Beijing, Beijing 100029
China

Daoguang Yang

University of International Business and Economics (UIBE)-Business School ( email )

#10 Huixindong St.
Chaoyang District
Beijing, 100029
China

Joseph H. Zhang (Contact Author)

University of Memphis

Memphis, TN 38152
Memphis, TN usa 38152-3370
United States

Haiyan Zhou

University of Texas - Pan American ( email )

1201 West University Drive
Edinburg, TX 78539
United States
956-381-3334 (Phone)
956-381-2407 (Fax)

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