Impact of Corporate Governance on Corporate Cash Holdings: An empirical study of firms in manufacturing industry of Pakistan

Muhammad Farhan Basheer

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Copyright © 2014 ISSR Journals. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. ABSTRACT: Basing on agency theory this empirical study explores the effect of corporate governance on managerial cash holding decisions. For the sake of a testable propositions concerning the determinants of corporate cash holdings, different theories of corporate cash holdings are reviewed (pecking order theory, trade off theory and free cash flow theory).The investigation is performed using panel data procedure for a sample of 138 firms listed on Karachi Stock Exchange during 2008-12.The results suggest that cash flow is the only variable which is statistically significant and positively related to cash holdings. Alternatively, liquidity, leverage, bank borrowing variability of cash flow is significantly and negatively related to cash holdings. Dividend, market-to-book ratio and ratio of non-executive to total directors are positively whereas firm size family dummy and CEO duality are negatively related to cash holdings but the relationships are insignificant. In particular managerial ownership (MAN) and MAN 3 is negative but significant however MAN 2 is positively related to cash holdings. These variations in sings indicate the non-linear relationship between managerial ownership and cash holdings. To author knowledge this is first study that explores corporate governance as an important determinant of cash holding.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1936The General Theory of Employment, Interest and Money.1977Determinants of corporate borrowing 1984The Capital Structure Puzzle 2000Investor protection and corporate governance 2000The separation of ownership and control in East Asian Corporations 1990Managerial discretion and optimal financing policies 2009Why Do U.S. Firms Hold So Much More Cash than They Used To?

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