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The impact of banking relationships, managerial incentives, and board monitoring on corporate cash holdings: an emerging market perspective

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  • Hai-Chin Yu
  • Ben Sopranzetti
  • Cheng-Few Lee

Abstract

This paper uses Taiwanese data to examine the impact of firm-level corporate governance mechanisms on firms’ average cash holdings. Specifically, it examines how a firm’s number of banking relationships and the percentages of managerial ownership and board ownership impact the firm’s level of cash holdings. We document that higher percentages of managerial ownership and board ownership are associated with higher levels of corporate cash holding. Our results are consistent with the notion that managerial incentives and board monitoring are substitutes for each other. The substitution effect is especially pronounced when firms have poorly incentivized managers. We find that firms with a larger number of banking relationships are associated with lower levels of cash holdings. We find no evidence of a bank monitoring free rider problem. We also document a life-cycle effect in the drivers of cash holdings: there are substantial differences in the drivers of cash holdings for firms that have been in business for more than 5 years relative to those that have not been in business less than 5 years. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Hai-Chin Yu & Ben Sopranzetti & Cheng-Few Lee, 2015. "The impact of banking relationships, managerial incentives, and board monitoring on corporate cash holdings: an emerging market perspective," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 353-378, February.
  • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:2:p:353-378
    DOI: 10.1007/s11156-013-0402-8
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    More about this item

    Keywords

    Bank monitoring; Managerial ownership; Banking relationship; Corporate governance; Cash holdings; G32; G34; G30; G31;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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