Corporate governance and the value of cash holdings

We investigate how corporate governance impacts firm value by comparing the value and use of cash holdings in poorly and well-governed firms. We show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88...

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Bibliographic Details
Published in:Journal of financial economics 2007-03, Vol.83 (3), p.599-634
Main Authors: Dittmar, Amy, Mahrt-Smith, Jan
Format: Article
Language:English
Subjects:
Business studies
Cash flow
Cash holdings
Cash management
Corporate finance
Corporate governance
Data analysis
Economic impact
Firm value
Ownership
Ownership structure
Studies
Take-over provisions
Take-overs
Valuation
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Summary:We investigate how corporate governance impacts firm value by comparing the value and use of cash holdings in poorly and well-governed firms. We show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88. Good governance approximately doubles this value. Furthermore, we show that firms with poor corporate governance dissipate cash quickly in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2005.12.006