Corporate Governance and Firm Cash Holdings

40 Pages Posted: 24 Oct 2005

See all articles by Jarrad Harford

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Sattar Mansi

Virginia Tech

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2006


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.

Keywords: Cash Holdings, Corporate Governance, Shareholder Rights

JEL Classification: G31, G34, G32, G35

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: or

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

William F. Maxwell

Southern Methodist University (SMU) - Finance Department ( email )

United States

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