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

Abstract

PurposeMotivated by the agency theory, this paper primarily intends to empirically investigate the impact of board attributes on corporate cash holdings and how the mentioned nexus is moderated by the level of corporate political connections in a developing country, namely, Palestine during the period of 2011–2018.Design/methodology/approachMultiple regression analysis on a panel data was employed. Moreover, the authors applied three different approaches of static panel data “pooled OLS, fixed effect and random effect”. Fixed-effects estimator was selected as the optimal and most appropriate model. In addition, to control for the potential endogeneity problem and to profoundly analyze the study data, the authors perform the one-step system generalized method of moment estimator.FindingsThe results of this study provide support for the agency theory ideology, which considers that sturdy and well-established corporate governance (CG) paradigms minify the magnitude of cash held by companies. Furthermore, the findings distinctly unveil that the impact of board attributes is more positive under a high level of political connections.Research limitations/implicationsThis study was solely restricted to one institutional context “Palestine”; therefore, the results reflect the attributes of the Palestinian business environment. In this vein, it is possible to generate different findings in other countries, particularly in developed markets.Practical implicationsThe findings of this study can draw responsible parties, top management and policymakers' attention in developing countries to introduce and contextualize new mechanisms that can lead to better managing of corporate cash holdings.Originality/valueEmpirical evidence on the moderating role of political connection on the effect of board attributes on corporate cash holdings something that was predominantly neglected by the earlier research and has not yet examined by ancestors. Hence, to protrude nuanced understanding of this novel idea, this study minutely bridges this research gap and contributes practically and theoretically to the existing CG–cash holdings literature.

The Effect Of Corporate Governance On Cash Holdings

“…Board Size and Cash Holdings. The large board size can limit the number of cash holdings because the board of directors will act more cautiously on management decisions that may harm shareholders (Abuhijleh & Zaid, 2023). However, the large board size indicates poor corporate governance because decision-making becomes inefficient, so the board of directors cannot carry out supervisory duties adequately (Ferreira & Vicente, 2020).…”

“…In agency theory, large amounts of cash holdings have the potential to lead to opportunistic behaviour from company management (Hassanein & Kokel, 2019). If boards of directors can perform their functions effectively, then a high proportion of independent boards of directors can potentially reduce the amount of cash holdings (Abuhijleh & Zaid, 2023). If independent boards of directors are not actively conducting supervision, then they cannot monitor management effectively, which impacts the increase in the amount of cash held (Al-Najjar & Clark, 2017).…”

“…This happens because the larger board size makes the decision-making ineffective, resulting in conflicts of interest between management and shareholders, increasing and impacting the amount of cash holdings (Cambrea et al, 2022). Meanwhile, (Abuhijleh & Zaid, 2023;Talbi & Menchaoui, 2023) in their research found that a greater independent boards composition can reduce the amount of cash holdings because independent boards of directors can prevent decision-making that benefits management. In addition, (Abuhijleh & Zaid, 2023) found that the more frequent board meetings with management, the smaller the amount of cash holdings.…”

“…Meanwhile, (Abuhijleh & Zaid, 2023;Talbi & Menchaoui, 2023) in their research found that a greater independent boards composition can reduce the amount of cash holdings because independent boards of directors can prevent decision-making that benefits management. In addition, (Abuhijleh & Zaid, 2023) found that the more frequent board meetings with management, the smaller the amount of cash holdings. Meetings held by the board of directors can prevent opportunistic behaviour of management, which makes decisions that benefit them.…”

Do professional shareholders matter for corporate compliance with IFRS reporting requirements: the moderating effect of board independence

“…Therefore, standard errors are more likely to be affected by the potential problems of serial correlation and heteroscedasticity. In this context, to curb the influence of these dilemmas, the standard errors are clustered in two aspects: unit level and time level simultaneously (Omran et al , 2021; Abuhijleh and Zaid, 2022):…”