Financial Crisis, Corporate Governance and the Value of Cash Holdings

Daniel Tut

MPRA Paper from University Library of Munich, Germany

Abstract: We study how corporate governance impacts the deployment of internal capital when external financing is costly. Using the 2008 financial crisis as a quasi-natural experiment and difference-in-difference estimation strategy, we show that the propensity to invest out of pre-crisis cash reserves is highest for weakly-governed firms. Weakly-governed firms finance additional investment using short-term debt and allocate a higher fraction of post-crisis excess cash towards building up cash balances. Contrastingly, well-governed firms have a higher propensity to allocate excess cash towards increasing the value of pledgeable assets and use accumulated cash balances to reduce short-term debt financing. Well-governed firms trade-off the cost of cash holdings against the benefit of minimizing future demand for costly external financing; effectively hedging against foregoing profitable future investment opportunities. Overall, optimal amount of internal capital increases with the cost of external financing

Keywords: Financial Crisis; Corporate Governance; Cash; Leverage; Pledgeable Assets (search for similar items in EconPapers)
JEL-codes: G01 G1 G18 G30 G31 G32 G35 (search for similar items in EconPapers)
Date: 2021-05-28
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/108593/1/MPRA_paper_108593.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/110868/8/MPRA_paper_110868.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108593

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().