The Relation between CEO-Friendly Boards and the Value of Cash Holdings

Hoontaek Seo (), Sangho Yi, Qing Yang and William McCumber
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Hoontaek Seo: Holzschuh College of Business Administration, Niagara University, NY 14109, USA
Sangho Yi: Sogang Business School, Sogang University, Seoul 04107, Republic of Korea
Qing Yang: Holzschuh College of Business Administration, Niagara University, NY 14109, USA
William McCumber: College of Business, Lousiana Tech University, Ruston, LA 71272, USA

JRFM, 2024, vol. 17, issue 3, 1-19

Abstract: Our study investigates how CEO-friendly boards influence the value and utilization of cash resources. In this paper, we analyze two conflicting views on CEO-friendly boards and their impact on corporate cash holdings: one view posits that such boards might be too lenient, fostering managerial moral hazard problem, while the other contends that they encourage CEOs to share information, despite CEOs knowing that better-informed boards could enforce stricter oversight. By measuring board friendliness through CEO-board social ties, we find that firms with a friendly board tend to maintain lower cash reserves but their excess cash is valued higher by the market compared to firms without such a board. Moreover, these boards deploy excess cash in ways that significantly enhance firm value. The results remain robust even after controlling for various governance variables and CEO characteristics. Our findings offer crucial insights for corporate practitioners and policymakers, highlighting the importance of appointing and retaining CEO-friendly directors to foster effective information exchange, especially in firms with substantial CEO-board information asymmetry in capital budgeting.

Keywords: friendly boards; cash holdings; excess cash; investment efficiency (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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