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Corporate Governance and Firm Cash Holdings

Jarrad Harford

University of Washington

Sattar Mansi

Virginia Tech

William F. Maxwell

SMU - Cox School

August 28, 2006

AFA 2006 Boston Meetings Paper

We examine the relation between the management of cash holdings and corporate governance. We find that firms with weaker corporate governance have smaller cash reserves. Further tests suggest that these firms dissipate their cash reserves more quickly than do managers of firms with stronger governance, and that rather than investing internally, they spend the cash primarily on acquisitions. The investment of cash by weakly governed managers reduces future profitability, an effect that is priced into those firms' stocks. We conclude that self-interested managers choose to spend cash quickly rather than gain flexibility through stockpiling it. This suggests that the expected discipline costs of visibly accumulating excess cash reserves are high. Our results, which contrast with recent research on the cross-country relation between shareholder rights and cash holdings, help explain how country level shareholder rights interact with firm-level agency problems and shareholder power.

Number of Pages in PDF File: 40

Keywords: Cash Holdings, Corporate Governance, Shareholder Rights

JEL Classification: G31, G34, G32, G35

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Date posted: October 24, 2005  

Suggested Citation

Harford, Jarrad and Mansi, Sattar and Maxwell, William F., Corporate Governance and Firm Cash Holdings (August 28, 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=595150 or http://dx.doi.org/10.2139/ssrn.595150

Contact Information

Jarrad Harford
University of Washington ( email )
Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)
HOME PAGE: http://faculty.washington.edu/jarrad/
Sattar Mansi (Contact Author)
Virginia Tech ( email )
William F. Maxwell
SMU - Cox School ( email )
Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States
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References:  26
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