Coopted Boards and Cash Holding

Abstract

This study investigates the relationship between board co-option and firms' cash holding behavior. It shows that as the fraction of co-opted directors increases, firms tend to hoard more cash due to agency reasons, indicating that co-opted boards are weaker monitors. The results remain robust to a battery of alternative tests. The study's findings support the flexibility view of agency theory. It also finds that external oversight mechanisms, in the form of institutional investors, analyst coverage, and takeover susceptibility, mitigate the documented effect. Overall, the study documents new evidence on the adverse effect of co-opted boards on cash holding.

Keywords: Board co-option; cash holding; agency theory; governance mechanisms

JEL Classification: G3, G30, G31