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Corporate codes of ethics and cash holdings: International evidence

Author

Listed:
  • Giorgio Gotti
  • Tony Kang
  • Michael C. Wolfe
  • Yong Keun Yoo

Abstract

In the presence of agency costs, managers retain cash for their own benefit at the expense of shareholder wealth. Extending prior literature on the role of corporate governance in mitigating the effects of agency conflicts on corporate cash holdings, we study a governance mechanism that has largely been overlooked, namely, corporate codes of ethics. We find a negative association between code of ethics quality and cash holdings, which suggests that managers hold less cash when the firm has a strong code of ethics in place. The effect is greater when agency costs are elevated due to weaker country‐level investor protections. We also find that payouts and the marginal value of cash holdings to investors are increasing in code quality. Overall, our results are consistent with codes of ethics helping to limit opportunistic behaviour from managers when determining the firm's level of cash holdings.

Suggested Citation

  • Giorgio Gotti & Tony Kang & Michael C. Wolfe & Yong Keun Yoo, 2023. "Corporate codes of ethics and cash holdings: International evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3387-3418, September.
    • Handle: RePEc:bla:acctfi:v:63:y:2023:i:3:p:3387-3418
    DOI: 10.1111/acfi.13042
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