Corporate Governance and Cash Holdings

Corporate Governance and Cash Holdings

Ahmed Hassanein
DOI: 10.4018/978-1-7998-4852-3.ch014
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Abstract

Corporate cash induces the opportunistic behavior of corporate managers that can create an agency problem. A corporate governance system controls the opportunistic behavior of managers and can affect the firm's policy on holding cash. This study explains how the aspects of corporate governance, country-level and firm-level governance, can affect the corporate policy on holding cash. First, the study provides the nature, definition, and importance of corporate cash holdings. Second, it outlines various motivations and theories behind holding corporate cash. Third, it explains the relation between firm-level governance and corporate cash holdings. Fourth, it focuses on the impact of firm-specific governance attributes on the level of corporate cash holdings. Fifth, it presents the relation between country-level governance and corporate cash holdings.
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2. Cash Holding: Definition

Cash is the first asset account listed on a statement of a firm’s financial position. The amount of cash is of interest to different stakeholders, such as existing and potential investors, lenders, and creditors. Investors use cash as a proxy for liquidity. Cash holdings, also referred to as cash hoardings, are defined as the level of cash and cash equivalents that are highly liquid assets that a firm can convert into cash in a short period of time (Ferreira & Vilela, 2004). Cash equivalents include the firm’s bank accounts, Treasury bills, and commercial paper as well as money market securities that have a maturity of 90 days. There are variations among countries in terms of the percentage of the level of cash. For instance, cash holdings can range from 8% to 12% in the UK, 8% to 17% in the US (Al-Najjar, 2013), and are 18.5% in Japan (Pinkowitz & Williamson, 2001). Also, the percentage ranges from 10% to15% in Switzerland (Drobetz & Grüninger, 2007), 7% to 9% in Spain (García-Teruel & Martínez-Solano, 2008), 9% to 10% in Italy (Bigelli & Sánchez-Vidal, 2012), and 10% to 13% in Turkey (Hassanein & Kokel, 2019). The variations in the levels of corporate cash holdings among countries may be due to differences in the corporate governance systems (Drobetz & Grüninger, 2007).

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