Corporate Governance and Cash Holdings: Evidence From the U.S. Property–Liability Insurance Industry

Abstract

This article examines the impact of board and finance committee characteristics on insurers' cash holdings using a sample of 1,454 U.S. stock property–liability insurer‐year observations. We focus on the roles of independent board members and independent finance committee members. Our results suggest that independent board members allow managers to hold excess cash holdings to avoid underinvestment and play a monitoring role in managers' cash spending behavior in a regulated industry. The overall findings are consistent with the independent director responsibility hypothesis, which suggests that independent directors play a monitoring role in managers' cash spending behavior and avoiding underinvestment problems.

The effect of predation risk on cash holdings: Empirical evidence from the U.S. property‐liability insurance industry

“…To examine the relationship between market concentration and cash holdings, we first follow the empirical method in Colquitt et al (; hereafter Colquitt et al, ) and Hsu, Huang, and Lai () and employ the linear regression model as our baseline model. The model is shown as follows: …”

“…Firm age : Hsu, Huang, and Lai () argue that older firms are able to generate more cash. Therefore, we expect a positive relation between firm age and cash holdings.…”

“…In one of the earliest papers in the insurance literature, Colquitt et al () investigate the determinants of cash holdings by property‐liability insurers and identify multiple factors that play an important role in shaping an insurer's cash holdings policy. Hsu, Huang, and Lai () study the role played by the board and the finance committee in the cash holdings of U.S. property‐liability insurers. They find that insurers with a higher proportion of outsiders on the board and the financial committee tend to hold more cash.…”

“…Some studies examining cash holdings in the insurance industry include Colquitt et al, (), Hsu, Huang, and Lai () and Xie, Wang, Zhao, and Lu ().…”

“…For example, Hsu, Huang, and Lai () report that the average ratio of cash and short‐term investments to total invested assets in their sample is 8.9% with a minimum of 0.00% and a maximum of 90.7%.…”