Corporate Governance and Cash Holding: New Insights from Concentrated and Competitive Industries

Idrees Ali Shah, Syed Zulfiqar Ali Shah, Muhammad Nouman, Farman Ullah Khan, Daniel Badulescu and Laura-Mariana Cismas
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Idrees Ali Shah: Institute of Business and Management Sciences (IBMS), The University of Agriculture Peshawar, Peshawar 25130, Pakistan
Syed Zulfiqar Ali Shah: Faculty of Management Sciences, International Islamic University, Islamabad 44000, Pakistan
Muhammad Nouman: Institute of Business and Management Sciences (IBMS), The University of Agriculture Peshawar, Peshawar 25130, Pakistan
Farman Ullah Khan: School of Management, Xi’an Jiaotong University, Xi’an 710000, China
Laura-Mariana Cismas: Department of Economics and Economic Modelling, West University of Timisoara, 300223 Timisoara, Romania
Authors registered in the RePEc Author Service: Laura-Mariana Cismaș

Sustainability, 2021, vol. 13, issue 9, 1-17

Abstract: The present study empirically investigates the effect of corporate governance on the value of cash holding, usage of excess cash, and firm performance in concentrated and competitive industries in the context of less developed countries. The empirical analysis was conducted in the panel data setting using Pakistan as a case study. Our findings suggest a strong relationship between the value of cash holding and corporate governance, and the complementary effect of product market competition for corporate governance. This suggests that the external market discipline is also needed, in addition to good governance, to resolve agency problems in less developed countries. This is because less developed countries are usually characterized by lower competition, poor mechanisms for shareholder protection, and weak legal systems. Consequently, agency problems are greater in less developed countries compared to developed countries. Our findings also indicate that firms with good governance dissipate less excess cash on internal investment, dividends and diversification in competitive industries. Moreover, the significant positive relationship between the lagged excess cash and corporate governance dummy interaction with the dividend supports the dividend outcome model, particularly in the concentrated industries. Finally, our results suggest that the efficient utilization of excess cash, induced by good governance, leads to better corporate performance in less developed countries.

Keywords: cash holding; corporate governance; product market competition; value of cash holding; developing economies (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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