Corporate Governance and Cash Holdings: Listed New Economy versus Old Economy Firms

Abstract

Manuscript Type: Empirical Research Question/Issue: This study examines the impact of corporate governance on the cash-holding policies of firms with different investment opportunities. It is difficult to determine the optimal level of cash holdings for "listed new economy" firms (firms in the computer, software, Internet, telecommunications, or networking industries), which require large amounts of capital for investment opportunities with high return potential. Unlike in "old economy" firms, for which investment opportunities are relatively limited, corporate governance in listed new economy firms may create shareholder protections that make investors willing to accept higher levels of corporate cash holdings. Research Findings/Results: By examining American Standard and Poor 1,500 companies, the evidence shows that CEO ownership and board independence affect the cash holdings in listed new economy and old economy firms differently. Specifically, higher managerial cash holdings tend to reduce cash holdings in old economy firms and higher board independence tend to increase cash holdings in listed new economy firms. Theoretical Implications: This study provides empirical support for the association between agency theory and cash theories. Given different firm characteristics, the impact of corporate governance on cash holdings verifies the implication of agency theory in explaining corporate cash policy. Practical Implications: While firms in new economy industries may be eager for more flexible governance codes in order to maintain the freedom of decision making, the evidence from this study suggests that establishing effective governance mechanisms may, in turn, effectively enlarge the degree of freedom for these firms to make timely business decisions.

Effect of Corporate Governance Structure on the Financial Performance of Johannesburg Stock Exchange (JSE)-Listed Mining Firms

“…The results imply that adding more directors on the board will decrease the financial performance of the firm, suggesting that a large board may not necessarily increase the value to the company. Previous studies by Azeez [26], Bliss [49], and Chen [27] support our result. Our results suggest that a small board is likely to lead to a higher performance because it avoids the problem of free riding which occurs among large boards.…”

“…This study employed ROE as the financial performance indicator following previous studies, such as [27,43]. This study made use of ROE as a measure of financial performance since investors are more interested in ROE and its changes, which provide an indication of the firm's efficiency.…”

“…The Hausman test is used to identify if the individual effects are fixed or random, in cases where individual effects exist. In determining a relationship between corporate governance and firm financial performance, we formulated the hypothesis and regression equation below: H1: Corporate governance structure influences return on equity (ROE) among selected JSE SRI listed mining firms Following previous studies, such as [27,42], the following regression equation is used:…”

“…Corporate governance impacts on cash holdings of companies with different investment policies comprising 1500 American Standard and Poor's firms show that CEO ownership and board independence affect cash holdings in listed firms differently [27]. However, there are indications that large boards result in the loss of productivity due to increased difficulties in coordinating the efforts of multiple individuals [27].…”

“…However, there are indications that large boards result in the loss of productivity due to increased difficulties in coordinating the efforts of multiple individuals [27]. As such, Salvioni et al [28] believe that sustainability can bring real convergence between outsider and insider corporate governance systems.…”