Independent directors’ geographic distance, high-speed railway, and corporate cash holdings

Abstract

Independent directors (IDs) located farther away from a company cannot obtain information on cash inflow and outflow conveniently and quickly. Information is the basis for IDs to supervise principal-agent problems, and it is challenging for long-distance IDs to supervise the firm's motivation for cash holding; however, there is little research into IDs' geographic distance effect on cash holdings. Using Chinese firm-level data from 2008 to 2017, we find that the farther the IDs' geographic distance, the more cash holdings held by the firm. Furthermore, high-speed railways weaken the positive relationship because of improvements in information and supervision. The mechanism test shows that geographic distance affects IDs through the mediating path of board meetings. Further research indicates that the effect of geographic distance is more significant when corporate governance is weak. IDs' geographic distance is new to the principal-agent literature and helps to explain the cash-holding puzzle.