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Corporate Governance and Cash Holdings: An Empirical Investigation of Indian Companies

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Advances in Finance & Applied Economics

Abstract

Indian corporations were holding considerable amounts of cash and cash equivalents (CCE). Extant literature suggests that agency conflicts and financing frictions are important determinants of corporate cash holdings. This study examines the relation between cash holding and the quality of firm-level corporate governance (CG). We use 24 structural indicators of CG relating to ownership, board and boards committees, audit considerations, and leverage characteristics along with a specific set of control variables. Four different measures of corporate cash holdings and liquidity have been employed. We begin with an exploratory inquiry into the dimensions of CG using principal component analysis and then use regression to delve into the association between cash holding and CG. Our evidence suggests that the quality of firm-level CG has important implications in deciding corporate cash holdings.

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Notes

  1. 1.

    Economic Times 20 August 2012.

  2. 2.

    http://www.thehindubusinessline.com/portfolio/iscashreallyking/article6347166.ece © The Hindu Business Line.

  3. 3.

    Why Are Corporations Holding So Much Cash? By Juan M. Sánchez and Emircan Yurdagul; The Regional Economist, January 2013.

  4. 4.

    Literature reveals that the focus on corporate cash holding started with the seminal work by Baumol (1952) followed by Miller and Orr (1966).

  5. 5.

    The Prowess database is supported by the Centre for Monitoring Indian Economy and includes information on private and listed companies. It is widely used for firm-level research on India (e.g. Bertrand et al. 2002 and Gopalan et al. 2007).

  6. 6.

    The Prowess database distinguishes between: (i) independent private domestic-owned firms not affiliated to business groups, (ii) firms affiliated with domestic business group, (iii) PSE, (iv) independent foreign firms, and (v) group affiliated foreign firms. According to CMIE, the classification of firms based on business group affiliation is based on “continuous monitoring of company announcements and a qualitative understanding of the group-wise behaviour of individual companies”.

  7. 7.

    Clause 49 of Securities Exchange Board of India (SEBI) Listing Agreement—As a major step towards codifying the CG norms, SEBI formulated Clause 49 in the Equity Listing Agreement (2000). It now serves as a standard of CG in India. It is applicable to companies which wish to get themselves listed in the stock exchanges. This clause has both mandatory and non-mandatory provisions.

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Authors and Affiliations

  1. Department of Commerce and Business Administration, St. Xavier’s College (Autonomous), 30 Park Street, Kolkata, 700016, India

    Amitava Roy

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  1. Amitava Roy
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Editors and Affiliations

  1. National Institute of Public Finance and Policy (NIPFP), New Delhi, India

    N.R. Bhanumurthy

  2. Maharaja Sayajirao University of Baroda, Vadodara, India

    K. Shanmugan

  3. Marathwada Mitra Mandal’s Institute of Management Education and Research, Pune, India

    Shriram Nerlekar

  4. Marathwada Mitra Mandal’s Institute of Management Education and Research, Pune, India

    Sandeep Hegade

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Roy, A. (2018). Corporate Governance and Cash Holdings: An Empirical Investigation of Indian Companies. In: Bhanumurthy, N., Shanmugan, K., Nerlekar, S., Hegade, S. (eds) Advances in Finance & Applied Economics. Springer, Singapore. https://doi.org/10.1007/978-981-13-1696-8_16

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  • DOI: https://doi.org/10.1007/978-981-13-1696-8_16

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