Does employees' interest matter more than shareholders’ interest in determining cash management policy?

Abstract

Extant literature suggests that firms that follow good corporate governance (CG) practices maintain lower cash holdings. Another strand of literature suggests that employee-friendly firms maintain higher cash holdings. The negative relationship between CG practices and cash holding, and the positive relationship between employee-friendly practices and cash holding raises question as to whether firms should undertake shareholder or stakeholder-friendly policies. Our study finds that the cash holdings are negatively related to employee-friendly practices. We also find that good CG practices are negatively related to cash holdings. Cross-country evidence suggests that employee-friendly firms affect cash holdings primarily when countries follow strong labour laws and regulations, suggesting that benefits provided at the country-level complement the benefits provided by the firm.