Corporate Governance and Cash Holdings: An Empirical Investigation of Indian Companies

Abstract

Indian corporations were holding considerable amounts of cash and cash equivalents (CCE). Extant literature suggests that agency conflicts and financing frictions are important determinants of corporate cash holdings. This study examines the relation between cash holding and the quality of firm-level corporate governance (CG). We use 24 structural indicators of CG relating to ownership, board and boards committees, audit considerations, and leverage characteristics along with a specific set of control variables. Four different measures of corporate cash holdings and liquidity have been employed. We begin with an exploratory inquiry into the dimensions of CG using principal component analysis and then use regression to delve into the association between cash holding and CG. Our evidence suggests that the quality of firm-level CG has important implications in deciding corporate cash holdings.