Corporate Governance and Cash Holdings: Evidence from Worldwide Board Reforms

Corporate governance and labor investment efficiency: International evidence from board reforms

“…Similarly, Fauver et al (2017) document no difference in the association between board reforms and firm value between two different systems of law. Second, we assess two different reform approaches, comply‐or‐explain (e.g., the UK Cadbury Report) and rule‐based (e.g., the 2002 Sarbanes–Oxley Act in the United States), and find that firms under rule‐based reforms benefit from a greater positive effect on labor investment efficiency than those under comply‐or‐explain reforms, in line with the findings of Li et al (2020) and Chen, Guedhami, et al (2020). Third, given that greater employment protection can lead to increased labor adjustment costs, which reduce firm flexibility in labor adjustment, we consider the effect of employment protection laws (EPLs) on the linkage between board reforms and efficient labor investment.…”

“…Since the first board reform of the Cadbury Report in 1992 in the United Kingdom, more than 40 countries have implemented various reforms to strengthen the board's role in shaping corporate governance practices. As a result, scholars are focusing their efforts on understanding the effect of these governance board reforms around the globe on firm‐level variables, such as firm value (Fauver et al, 2017), dividend policy (Bae et al, 2020), cost of debt (Li et al, 2020), cash holdings (Chen, Guedhami, et al, 2020), stock price crash risk (Hu et al, 2020), tax avoidance (Li et al, 2019), and IPO pricing (Chen, Goyal, & Zolotoy, 2020). We extend this strand of literature by examining the influence of board reforms on labor investment efficiency, addressing the role of human capital investment in firm performance.…”

“…Consequently, managers have less incentive to conceal bad performance, which, in turn, reduces stock price crash risk. Chen, Guedhami, et al (2020) show that firms are more likely to reduce cash holdings following board reforms because the improvement in internal corporate governance from stronger board monitoring limits the cash holdings at the managers' discretion. Recently, Chen, Goyal, and Zolotoy (2020) argue that board reforms are related to a significant reduction in IPO first‐day returns because stronger board oversight following board reforms reduces the underpricing discount.…”

“…Beasley (1996) shows that board independence benefits firms in enhancing report quality and in reducing earning management in particular (Peasnell et al, 2005). Recent works show that better corporate governance following major board reforms enhances firm value (Fauver et al, 2017), reduces stock price crash risk (Hu et al, 2020), and reduces cash balances (Chen, Guedhami, et al, 2020). A plausible reason is that board reforms improve financial transparency and boost internal corporate governance by strengthening monitoring roles and, in turn, mitigating information asymmetry and agency problems.…”

“…Our study contributes to the literature in several ways. First, we augment an emerging body of literature concerning the understanding of the linkage between corporate board reforms and various corporate policies and performance, such as firm value (Fauver et al, 2017), CSR (Liao et al, 2021), cash holdings (Chen, Guedhami, et al, 2020), dividend payouts (Bae et al, 2020), stock price crash risk (Hu et al, 2020), cost of debt (Li et al, 2020), and IPO pricing (Chen, Goyal, & Zolotoy, 2020). Despite its intuitive appeal, there is still no empirical evidence on the effect of board reforms on firm‐specific labor investment efficiency.…”