Corporate Governance and the Value of Cash Holdings

Abstract

We investigate how corporate governance impacts firm value by comparing the value and use of cash holdings in poorly and well governed firms. We show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88. Good governance approximately doubles this value of cash. Furthermore, we show that firms with poor corporate governance dissipate cash quickly in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed.

Keywords: governance, cash, firm value

JEL Classification: G32, G34, G12