Governance mechanisms, investment opportunity set and SMEs cash holdings

Abstract

This study analyses the effect of firm characteristics and governance mechanisms on cash holdings for a sample of UK SMEs. The results show that UK SMEs with greater cash flow volatility, and institutional investors hold more cash; whereas levered and dividend paying SMEs with non-executive ownership hold less cash. We also find that ownership structure is significant only in explaining the cash holdings for firms with high growth investment opportunities, and leverage is only significant in explaining the cash held by firms with low growth investment opportunities. Our findings suggest that internal governance mechanisms are more effective for SMEs with high growth investment opportunities, while external governance mechanisms, such as capital market monitoring, are more effective for firms with low growth investment opportunities.

Board Characteristics, Political Connections, and Corporate Cash Holdings: The Role of Firm Size and Political Regime

“…According to this view, self-interested managers try to hold massive liquidity, which would be limited by the shareholder for mitigating agency conflict (Boubakri et al, 2013). In addition, a firm may establish a corporate governance mechanism to lessen agency conflict, because any surge or reduction in excess cash holdings depends on the structure of corporate governance (Belghitar & Khan, 2013).…”

“…In addition, Sethi, Cunningham, and, Swanson (1979) argued that larger representation of NXD on the board may lead to ineffective board monitoring and create conflict of interest between the board and top management. From the study of SMEs' in UK setting, (Belghitar & Khan, 2013) found an insignificant relation between representation of NXD and firm's cash holding and argued that the mechanisms of NXD on the board are ineffective to mitigate free cash flow problems. Based on the arguments mentioned, we hypothesize as:…”

“…Moreover, as compared to physical assets, massive cash holding can more easily be used by managers for private benefits (Chen & Chuang, 2009). Belghitar and Khan (2013) found that any change in excess cash holding depends on a firm's corporate governance structure. Prior studies tried to linked firm's corporate governance with cash holding in international settings (Dittmar et al, 2003;Pinkowitz, Stulz, & Williamson, 2006;Harford, Mansi, & Maxwell, 2008).…”

Corporate governance and dividend pay-out policy in UK listed SMEs

“…Thus, failure of SMEs can lead to significant reputational damage to the sector, as well as the UK economy (Herbane, 2013). In spite of the importance of SMEs to UK and worldwide economy, there seems to be a lack of empirical evidence regarding the impact of board mechanisms on dividend pay-out policies of SMEs (Belghitar & Khan, 2013).…”

Working capital management, cash flow and SMEs' performance

“…Cash flow can also help companies to avoid the likelihood of financial distress, especially for those companies with more volatile cash flows (Ferreira and Vilela, 2004). Belghitar and Khan (2013) indicate that market imperfections, such as financial distress, are more severe for SMEs. This logic leads to the following hypothesis:…”