Corporate Governance and Cash Holdings: Empirical Evidence from an Emerging Country, Sri Lanka

Alagathurai Ajanthan,Kga Udhaya Kumara

doi:10.5296/ijafr.v7i2.12137

Alagathurai Ajanthan, Kga Udhaya Kumara

Open Access

https://doi.org/10.5296/ijafr.v7i2.12137

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Abstract

This study examines the influence of corporate governance practices on cash holdings of Sri Lankan listed companies. It develops hypotheses about the relationship between cash holding and corporate governance practices such as size, frequency of meetings, independence, independent chair and gender diversity. Using multiple regression analysis on data collected from the corporate annual reports of 90 listed companies, the study finds that corporate governance practices such as board size and gender diversity have a significant negative influence on cash holdings as well as independent chair has a significant positive influence on cash holdings. However, there is no evidence that board meetings affect cash holding in Sri Lankan companies. The study contributes to the literature on the factors that make variation in the amount of cash holding of the listed company and it may be useful for financial managers, business analyst, financial controller, operations managers, investors, financial management consultants and other stakeholders.

Highlights

Cash is the most liquid asset and is a measure of a corporation’s ability to pay its bills on time
Using multiple regression analysis on data collected from the corporate annual reports of 90 listed companies, the study finds that corporate governance practices such as board size and gender diversity have a significant negative influence on cash holdings as well as independent chair has a significant positive influence on cash holdings
Cash Holdings (CH) is used as proxy to calculate the amount of cash and size of the board; board composition; CEO duality; gender diversity; board meetings are explanatory variable as a proxy of CHPs and firm size; sales growth and firm performance are used as explanatory variables which are similar to those used by Gill and Biger (2013); Velnampy (2013) and Kajananthan and Achchuthan (2013)

Summary

Introduction

Cash is the most liquid asset and is a measure of a corporation’s ability to pay its bills on time. An optimal level of cash based on the firm’s needs is the essential ingredient that enables a business to survive and prosper (Gill and Shah, 2012). It has always been a critical problem in a company to decide an appropriate amount of cash for day-to-day operation of the business. Firms have the enticement to hold cash to ensure the operations, meet short term obligations and pick the good investment opportunities. Opler et al, (1999) identify that companies with good investment opportunities and high cash flow risks tend to hold more cash. Weak governance mechanism further triggers managers to hold more cash, which may cause imprudent overinvestment like expensive acquisitions, and subsequently have negative effect on the shareholders’ wealth (Dittmar, Mahrt-Smith & Servaes, 2003 and Jensen, 1986)

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