Corporate Governance and the Value of Excess Cash Holdings of Large European Firms
AbstractWe examine the relation between the quality of corporate governance and the value of excess cash for large European firms (FTSEurofirst 300 Index). We use Deminor ratings for Shareholder rights, Takeover defences, Disclosure and Board as proxies for the quality of corporate governance. We find that the value of excess cash is positively related to the Takeover defences score only. It seems that governance mechanismsâ€”except the market for corporate controlâ€”are not strong enough to prevent managers from wasting excess cash. For non-UK firms we find that the value of â‚¬1 of excess cash in a poorly governed firm is valued at only â‚¬0.89 while the value is â‚¬1.45 for a good governed firm. We show that poorly governed firms dissipate excess cash relatively quickly with a negative impact on their operating performance as a result.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2008-027-F&A.
Date of creation: 20 May 2008
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Web page: http://www.erim.eur.nl/
corporate governance; excess cash; take-over defences;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
- NEP-BEC-2008-06-13 (Business Economics)
- NEP-CFN-2008-06-13 (Corporate Finance)
- NEP-EEC-2008-06-13 (European Economics)
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