Corporate Governance and Firm Cash Holdings in the U.S.
Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the U.S., weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.
The authors would like to thank Tom Bates, Murillo Campello, Mike Cliff, Amy Dittmar, Kathy Kahle, Sandy Klasa, Scott Lee, Karl Lins, Ed Rice, Jan Mahrt-Smith, Laura Starks, Mike Weisbach, an anonymous referee, and seminar participants at the 2006 American Finance Association Meetings and Penn State University for their helpful comments and suggestions. Harford gratefully acknowledges the support of the UW CFO Forum and the Reimers and McCabe fellowships. Mansi acknowledges receipt of partial funding from Virginia Tech’s summer support. The remaining errors are the sole responsibility of the authors.
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