Corporate governance and cash holdings: Evidence from worldwide board reforms

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2020-12, Vol.65, p.101771, Article 101771
• Main Authors: Chen, Ruiyuan (Ryan), Guedhami, Omrane, Yang, Yang, Zaynutdinova, Gulnara R.
• Format: Article
• Language: English
• Subjects: Board reforms; Cash holdings; Corporate governance; Institutions; Value of cash
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2020.101771

Using staggered board reforms as a quasi-natural experiment and a difference-in-differences approach, this study examines the impact of corporate governance on cash holdings in 41 countries. We find that board reforms are followed by significant reductions in cash holdings. This effect is more pronounced for firms with weaker pre-reform corporate governance and for firms from countries with weaker institutional environments. Analysis of cash spending suggests that, following board reforms, firms are more likely to use cash to increase R&D expenditures, dividend payouts, and share repurchases, but not to increase capital or acquisition expenditures. Finally, the results indicate that enhanced corporate governance following board reforms leads to higher (lower) cash (dividend payouts) values, consistent with the view that board reforms strengthen corporate governance. •We examine the impact of board reforms on cash holdings in 41 countries.•Board reforms are followed by significant reductions in cash holdings.•Effect is more pronounced for firms with weaker pre-reform corporate governance.•Effect is stronger for firms from countries with weaker institutional environments.•Enhanced corporate governance following board reforms leads to higher cash values.