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Corporate Governance and the Value of Excess Cash Holdings of Large European Firms

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  • Schauten, M.B.J.
  • van Dijk, D.J.C.
  • van der Waal, J-P.

Abstract

We 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 mechanisms—except the market for corporate control—are not strong enough to prevent managers from wasting excess cash. For non-UK firms we find that the value of €1 of excess cash in a poorly governed firm is valued at only €0.89 while the value is €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 Info

Paper 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 ERIM Report Series Research in Management with number ERS-2008-027-F&A.

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Date of creation: 20 May 2008
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Handle: RePEc:ems:eureri:12465

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Keywords: corporate governance; excess cash; take-over defences;

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Cited by:
  1. Godfred A. Bokpin & Zangina Isshaq & Francis Aboagye-Otchere, 2011. "Ownership structure, corporate governance and corporate liquidity policy: Evidence from the Ghana Stock Exchange," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(3), pages 262-279, August.

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