Corporate Governance and Firm Cash Holdings

Posted: 22 May 2007

See all articles by Jarrad Harford

Jarrad Harford

University of Washington

Sattar Mansi

Virginia Polytechnic Institute & State University

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Multiple version iconThere are 2 versions of this paper

Abstract

We examine the relation between the management of cash holdings and corporate governance. Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. When investing the cash, firms with weaker governance structures increase capital expenditures more and this difference is exacerbated with higher excess cash. Similarly, we find that firms with excess cash are more likely to increase acquisition activity and this is exacerbated when the excess cash is combined with weaker shareholder rights. R&D is unrelated to excess cash in general, but is lower in firms with weak shareholder rights. We examine whether these choices are suboptimal through their impact on profitability and firm value, and document that firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is little evidence that the presence of excess cash alters the overall relation between governance and profitability. Our results are consistent with the market expecting poorly governed firms to dissipate firm value through actions such as overpaying in acquisitions, rather than through future decreased profitability.

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. Journal of Financial Economics, Forthcoming; AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=987559

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 Polytechnic Institute & State University ( email )

William F. Maxwell

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

United States

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