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.
Highlights
Introduction published maps and institutional affilFirms with sufficient internal funds survive better in periods of crisis compared to firms with insufficient funds [1]
Corporate Governance (CG) has less significance in competitive industries compared to concentrated industries, in terms of determining cash holding and/or the usage of excess cash
If the benefit of cash holding is less from the cost of cash holding, this causes a reduction in firm value
Summary
Corporate Governance (CG) is a considered at contrivance to ensure the protection and maximization of stakeholders’ wealth [38]. Agency based theories propose contrary predictions, that is large amounts of cash in the hands of entrenched managers causes damage to the value of the firm because they utilize cash for serving their own interests instead of shareholders’ interests [8,40] These agency problems are somewhat controlled by PMC because external market discipline forces managers to work efficiently in the best interest of shareholders. Empirical work by Ammann, Oesch and Schmid [33], using international data, shows that firm value is significantly affected due to CG in concentrated industries Their result supports the substitution argument of competitive pressure on the CG and firm value relationship. The outcome model portrays that good governance enables investors, minority shareholders, to pressurize managers for the distribution of excess cash in the form of dividends to control over-investment problems. Good governance leads firms to spend less cash in the form of capital expenditure
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