The Effect of ESG Performance on Corporate Credit Risk

Park, Dojoon; Park, Hyejin; Lee, Ji-Yoon

doi:10.37197/arfr.2023.36.1.3

Cited by 1 publication

(3 citation statements)

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“…This hypothesis posits that stronger corporate governance can mitigate agency problems, reducing the need for large cash holdings as a buffer. Furthermore, the regression analysis reveals significant associations between a firm's cash holdings and several other variables, such as the Lev, NetWC, CapEx, and R&D. These associations are consistent with the findings from earlier studies, including those by Park and Yeon (2009), Kusnadi (2011), and Chen et al ( 2020), which also support the flexibility hypothesis. These results, therefore, reinforce the notion that the management of cash holdings in firms is significantly linked to the effectiveness and strength of their corporate governance structures.…”

Section: Resultssupporting

confidence: 89%

“…This significant influence of agency conflicts in dictating a firm's cash holding strategy is a critical observation of this research. This result is consistent with prior literature that supports the flexibility hypothesis, such as Park and Yeon (2009) cate that the negative correlation between compliance with core governance indices and cash holdings is more conspicuous in firms possessing lower levels of organizational capital. This observation lends support to the precautionary motive perspective.…”

Section: Discussionsupporting

confidence: 92%

“…A study by Park and Yeon (2009) that firms with strong corporate governance practices, particularly those emphasizing robust shareholder protection, are likely to maintain lower levels of cash holdings. This finding significantly bolsters the agency theory by highlighting that the extent of agency conflicts within firms is a crucial determinant of their cash holdings.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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Corporate governance and cash holdings: Focusing on a corporate governance report in Korea

Troy Chua,

Lee

2024

Investment Management and Financial Innovations

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This study examines the effect of corporate governance on a company’s cash holdings, focusing on a firm’s compliance levels with core corporate governance indicators as outlined in the corporate governance report. Utilizing a random effect generalized least squares (GLS) regression model, this study evaluates 812 firm-year observations from Korean publicly traded companies covering the period 2018 to 2021. The results indicate that companies with robust governance structures generally maintain lower levels of cash holdings (coefficient = –0.0263, p-value = 0.044), corroborating the flexibility hypothesis. Moreover, higher compliance levels with governance matters concerning shareholder protection (coefficient = –0.0388, p-value = 0.090) and board of directors (coefficient = –0.0512, p-value = 0.052) are associated with reduced cash holdings. Further analysis, accounting for a firm’s organizational capital, underscores that the inverse relationship between corporate governance and cash holdings is more pronounced in organizations with lesser organizational capital (coefficient = –0.0548, p-value &lt; 0.01). This study contributes empirical evidence showing that strict compliance with core corporate governance indicators, indicative of strong corporate governance, substantially affects a firm’s cash management. Additionally, this study offers valuable insights for regulatory authorities and investors and enhances the existing body of knowledge on the interplay between corporate governance and cash holdings.