Corporate Governance's Policy on the Impact of Cash Holding in Indonesia

Anisa Kusumawardani,Rizky Yudaruddin,Yanzil Azizi Yudaruddin

doi:10.13189/ujaf.2021.090407

Anisa Kusumawardani, Rizky Yudaruddin + Show 1 more

Open Access

https://doi.org/10.13189/ujaf.2021.090407

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Abstract

The Asian Financial Crisis in 1997 and various other scandals in large companies in Indonesia led to the emergence of good corporate governance (GCG). Regulators on the capital markets understand that good corporate governance promotes transparency and improves the quality of financial reporting, including cash management, responsibly. Furthermore, high cash levels lead managers to misuse the fund for personal gain, because the assets under their supervision increase thereby. This research analyzes the effect of corporate governance, such as board size, and independence on cash holding in Indonesia. Data were obtained from 373 firms in seven industries publicly tabulated on Indonesia Stock Exchanges (IDX) from 2008-2017 and 2,742 firm-year observations. The obtained data were analyzed using Common, Fixed, and Random Effects Models. The result showed that the total number of the board of directors, is positively and significantly proportional to Board Size thereby increasing the company holds cash. Meanwhile, the other corporate governance variable, known as Board Independence, is insigniﬁcant in any three models. The result also showed positive coefﬁcients of board size on cash holding (CASH) in companies with and without CEO duality. The result further showed that the independent board had a significant and negative impact on cash holding (CASH), which is more pronounced in companies with CEO duality and used to strengthen corporate governance. The results have specific policy implications like the importance of corporate governance, in particular the role of the Board of Directors in the effective supervision of managers and transparency of enterprises.

Highlights

The topic of corporate governance and cash holding policy is investigated in this article
Previous empirical studies further reported the important act of corporate governance in cash holding policy. [2], [3], [4], [5] and [6] reported the presence of an agency motive associated with cash holding
This review focuses on the association between corporate governance and cash holdings in businesses with dual CEOs

Summary

Introduction

The topic of corporate governance and cash holding policy is investigated in this article. Previous empirical studies further reported the important act of corporate governance in cash holding policy. Agency motive is driven by differences in interests and due to a significant amount of cash in the company's possession, transparency is needed to reduce conflicts It is critical for practitioners and researchers to explore corporate governance's impact on cash holdings in a variety of contexts. This research is driven by this problem and presents an early examination of the connection between corporate governance and cash management policies. Capital market regulators in Indonesia, as the biggest stock market in Southeast Asia, understand that the application of good corporate governance encourage transparency and responsibly improve the quality of financial reports, including cash management. But certainly not least, this paper presents the data and their analysis, and concludes with a synopsis of the major findings

Literature Review

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Result and Discussion

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