Politically connected outside directors and the value of cash holdings

Abstract

We investigate the impact of politically connected outside directors (PCODs) on the market value of firm cash holdings, using a hand-collected sample of PCODs in Korean chaebol firms. PCODs may reduce the precautionary motives for holding cash by reducing the likelihood of future cash flow shocks. However, they may exacerbate agency conflicts between controlling shareholders and minority shareholders. We find that firms with PCODs tend to exhibit a lower market value of cash holdings compared to those without PCODs. This relationship is driven by a reduction in precautionary motives rather than by agency conflicts, shedding light on how PCODs contribute to firm value.