Corporate Governance, Cash Holdings And Firm Value

Cash is considered as a most important part of firm’s assets. Firm’s cash holdingdecision not only reflects the firm’s operation and financial strategy, but also is closelyrelated to corporate governance situation and institutional environment. Brealey andMyers(2000) stated that the value of firm cash holdings is one of the ten unsettled puzzlesin the financial research field. The issue has aroused widespread concern of scholars inhome and abroad in recent years, whether does the corporate cash holdings have a positiveimpact or negative impact on firm value?The paper is based on reviewing systematically the relevant literature in these twodomain of corporate cash holdings the determinants of corporate cash holdings and theeconomic consequences of corporate cash holdings. Then it selects non-financial listedcompanies in Shanghai and Shenzhen Stock Exchange with complete financial data from2005to2009as samples, using the Linear Structural Equation model, empiricallyresearches the relationship of the level of corporate cash holdings and firm value, then itintroduces the corporate governance variable to study how corporate governance structurereflects the path between cash holdings and firm value.The research results show:(1)In the empirical research of the relationship of corporate cash holdings and firmvalue, the paper uses TOBIN Q and return on assets ROA as two indicators measuringfirm value to examine the association between corporate cash holdings and firm value,concludes that the firm value is negatively associated with the cash levels, the agencycosts arising from the conflicts of interests between managers and shareholders makingcorporate cash holdings pay a negative impact on firm value, which supports the agencycost theory.(2)In the empirical research of analysis of the impact of corporate governance, weselect the board size, proportion of independent directors, separation of CEO andchairman and level of managerial ownership as five indictors of corporate governancestructure, find that good corporate governance structure could significantly improve thenegative correlation between cash holdings and firm value. The more perfect the corporate governance structure, the weaker the negative correlation between cash holdings and firmvalue.(3)It’s that the five indicators the board size, proportion of independent directors,separation of CEO and chairman and level of managerial ownership can generally portraythe corporate governance structure. Besides, the empirical research concludes as follows:the board size, proportion of independent directors, separation of CEO and chairman arenegatively associated with corporate governance; the level of managerial ownership ispositively associated with corporate governance.