Corporate Governance and Cash Holding: New Insights from Concentrated and Competitive Industries

Abstract

The present study empirically investigates the effect of corporate governance on the value of cash holding, usage of excess cash, and firm performance in concentrated and competitive industries in the context of less developed countries. The empirical analysis was conducted in the panel data setting using Pakistan as a case study. Our findings suggest a strong relationship between the value of cash holding and corporate governance, and the complementary effect of product market competition for corporate governance. This suggests that the external market discipline is also needed, in addition to good governance, to resolve agency problems in less developed countries. This is because less developed countries are usually characterized by lower competition, poor mechanisms for shareholder protection, and weak legal systems. Consequently, agency problems are greater in less developed countries compared to developed countries. Our findings also indicate that firms with good governance dissipate less excess cash on internal investment, dividends and diversification in competitive industries. Moreover, the significant positive relationship between the lagged excess cash and corporate governance dummy interaction with the dividend supports the dividend outcome model, particularly in the concentrated industries. Finally, our results suggest that the efficient utilization of excess cash, induced by good governance, leads to better corporate performance in less developed countries.

Do political connections shape the nexus between board attributes and corporate cash holdings?

“…A large number of studies has been performed to investigate the determinants of corporate cash holdings (see Al-Najjar, 2013;Bigelli and S anchez-Vidal, 2012;Gao et al, 2013;Subramaniam et al, 2011;Shah et al, 2021). In this sense, over the last decade, examining the impact of CG practices on the level of cash holdings has been drawn a significant attention (Ferkins et al, 2018;Soobaroyen et al, 2017).…”

Debt maturity structure and firm investment in the financially constrained environment

“…Thus, compared to the developed and the leading developing countries, the financing and investment decisions of corporations operating in relatively less developed countries are significantly constrained (Lee and Islam, 2011;Gorodnichenko and Schnitzer, 2010;Khan et al, 2020). This is because the financial markets of such countries are characterized by lower stability, inefficiency, limited and restrained access, and lack of depth (Gul et al, 2012;Fan et al, 2012;Shah et al, 2021). Furthermore, the weak property rights, inefficient legal system, weak investor protection system and less robust accounting standards of poor countries magnifies the underlying financial risks (Nouman et al, 2018(Nouman et al, , 2019Doidge et al, 2007).…”

“…Moreover, the firms operating in Pakistan have different attitudes towards holding and investment of excess cash compared to the firms operating in developed markets (Shah et al, 2021). The firms operating in Pakistan have higher preference for holding excess cash mainly due to the fact that the cost of external financing is higher due to capital market frictions (Azam and Shah, 2011).…”

“…Furthermore, the prevailing weak property rights and inefficient legal system of Pakistan induce significant financial risks which in turn worsen the financial constraints (Nouman et al. , 2018, 2019; Shah, 2011; Shah et al. , 2021).…”

Pengaruh Struktur Jatuh Tempo Utang Dan Leverage Terhadap Investasi Perusahaan Pada Perusahaan Sektor Infrastruktur.

“…Dibandingkan dengan negara maju dan negara berkembang terkemuka, keputusan pendanaan dan investasi perusahaan yang beroperasi di negara yang relatif kurang berkembang secara signifikan dibatasi (Kaleem Khan et al, 2020). Ini karena pasar keuangan negara-negara tersebut dicirikan oleh stabilitas yang lebih rendah, inefisiensi, akses yang terbatas dan terkendali, dan kurangnya kedalaman (Shah et al, 2021). Lebih jauh lagi, hak kepemilikan yang lemah, sistem hukum yang tidak efisien, sistem perlindungan investor yang lemah, dan standar akuntansi yang kurang kuat dari negara-negara miskin memperbesar risiko keuangan yang mendasarinya (Nouman et al, 2022).…”