jurnal cf tambahan

8/3/2019 jurnal CF tambahan

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Cash Holdings, Corporate Governance Structure and

Firm Valuation

Kin Wai LeeAssistant Professor

Division of Accounting

S3-B2A-19 Nanyang Avenue

Nanyang Business School

Nanyang Technological University

Singapore 639798Tel : (65) 6790-4663

Fax : (65) 6792-4217

email : [email protected]

Cheng-Few Lee

Rutgers UniversityDistinguished Professor of Finance

Department of Finance

School of BusinessRutgers University

United States of America.

Phone: (732) 445-3907

Fax: (732) 445-5927

E-mail: [email protected].

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mailto:[email protected]:[email protected]


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Abstract

Firms with higher board independence, smaller boards, and lower expected

managerial entrenchment, have lower cash holdings. We find that the negative

association between cash holdings and managerial entrenchment is mitigated by

stronger board structures. Specifically, in firms with higher expected managerial

entrenchment, those with higher proportion of outside director on the board and

smaller board size have lower cash holdings. We also find that firm value is

negatively associated with cash levels. The negative association between firm value

and cash holdings is more pronounced in firms with (i) lower proportion of outside

directors, (ii) larger boards and (iii) higher expected managerial entrenchment. For

firms with both high cash holdings and high expected managerial entrenchment,

investors additionally discount the valuation of firms with lower proportion of outside

directors and those with larger boards.

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1. Introduction

In South-East Asia (ASEAN), cash represents a substantial portion of corporate assets.

ASEAN firms increased their mean cash holding from 8% in 1996 to 12% in 2005.

While larger cash holdings increases internal financial flexibility by reducing the

costs associated with external financing, there may be potential adverse consequences

associated with holding excessive cash. Central to this view is the conflict between

managers and shareholders over the deployment of corporate resources when firms

have large free cash flow (Jensen, 1986). Self-interested managers may pursue private

benefits of control by holding excessive cash and overspending cash on value-

destroying projects. This paper examines the relation among cash holdings, corporate

governance structure and firm valuation. Specifically, our primary research questions

are: (1) Do firms with stronger governance structure have lower corporate cash

holdings? (2) In firms with high cash holdings, is firm valuation higher when

corporate governance structure is stronger? (3) In firms with both high cash holdings

and high expected managerial entrenchment, do firms with stronger board structure

have higher valuation of cash reserves?

Prior US research provides mixed evidence on whether investors should be concerned

with large cash reserves. Mikkelson and Partch (2003) find that large extreme cash

holdings is not associated with poor firm performance and do not represent conflicts

of interests between managers and shareholders. However, Harford (1999) shows US

firms with large cash reserves spend more on acquisitions and those acquisitions by

cash-rich firms are value-destroying. Harford, Mansi and Maxwell (2007) find that in

the United States, firms with weaker corporate governance structures (proxied by anti-

takeover provisions) actually have smaller cash reserves. They document that poorly

governed firms dissipate cash more quickly and the firms spend the cash mainly on

acquisitions. Furthermore, firms with low shareholder rights and excess cash have

lower profitability and valuations. They do not find any association between corporate

cash holdings and board attributes such as board size and board independence.

Dittmar and Mahrt-Smith (2007) find that investors assign a much lower value to an

additional dollar of cash holdings of a poorly governed firm compared to a well-

governed firm in United States. Furthermore, they document that firms with both

high excess cash and poor governance subsequently experience low operating

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performance. The negative impact of large cash holdings on future operating

performance is cancelled out if the firm is well governed.

Using international data, prior research find that in firms in countries with poor

shareholder protection, managers can hoard cash and pay low dividends. Dittmar,

Mahrt-Smith, and Servaes (2003) find that firms in countries with strong shareholder

protection hold less cash. Pinkowitz, Stulz, and Williamson (2006) show that cash is

worth less to the minority shareholders of firms in countries with low investor

protection. This finding is consistent with the hypothesis that poor protection of

investor rights makes it easier for management and controlling shareholders to

expropriate corporate resources for their own benefit. Using data from 31 countries,

Kalcheva and Lins (2007) find that (i) firms with entrenched managers hold more

cash, particularly when country-level shareholder protection is poor, and (ii) firm

values are discounted when firms with entrenched managers hold high levels of cash,

particularly when country-level shareholder protection is poor.

Our sample consists of 1,061 firms for 4,206 firm-year observations during the period

2001 to 2005 in five Asian countries (Malaysia, Philippines, Indonesia, Singapore and

Thailand). We begin our analysis by examining the association between cash

holdings, board structure and management ownership structure. After controlling for

economic determinants of cash holdings, we find that firms with higher proportion of

outside directors on the board, separate CEO and chairman positions, and smaller

boards, have lower cash holdings. Thus, firms with stronger board structure hold

lower cash reserves beyond their operations and investment needs. At low level of

managerial equity ownership, there is no association between corporate cash holding

and managerial equity ownership. In contrast, as managerial ownership continues to

increase to a high level, firms hold more cash reserves. Our result is consistent with

Morck, Shleifer and Vishnys (1988) argument that at high managerial ownership, the

entrenchment effect dominates and consequently, firms with high expected

managerial entrenchment hoard more cash. We also find that the negative association

between cash holdings and expected managerial entrenchment is mitigated by

stronger board structures. Specifically, in firms with higher expected managerial

entrenchment, those with higher proportion of outside director on the board, and firms

with smaller board size, have lower cash holdings.

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Next, we examine the association between firm value and cash holdings. We find that

firm value is negatively associated with cash levels. This result suggests that in firms

with high cash holdings, investors are concerned that managers have more discretion

to deploy corporate resources on value-destroying projects, consistent with Jensens

(1986) theory on the agency costs of free cash flow. This raises an important question:

Do alternative corporate governance structures systematically affect the association

between firm valuation and corporate cash reserves? Our results indicate that the

negative association between firm value and cash holdings is more pronounced in

firms with (i) lower proportion of outside directors, (ii) larger boards and (iii) higher

expected managerial entrenchment. Thus, our findings suggest that in firms hold

excess cash, firm valuation is discounted by investors when corporate governance

mechanisms impose weak constraints to curb managerial utilization of excess cash.

We also document that for firms with both high cash holdings and high expected

managerial entrenchment, investors additionally discount the valuation of firms with

lower proportion of outside directors on the board and those with larger boards.

Collectively, our results are consistent with the hypothesis that when entrenched

managers pursue their interests at the expense of external shareholders, liquid assets

are worth less to external shareholders in firms in which the appropriation of private

benefits is easier because some of these assets are used to finance the entrenched

managers private benefits.

As a robustness test, we extend our measure of cash to consider the effects of

governance on the valuation of excess cash. Following Dittmar and Smith (2007), we

define excess cash as cash held by firms that is not needed for firm operations or

investments. Our results are qualitatively similar. Firms with strong board structures

and low expected managerial entrenchment have low excess cash. In addition, excess

cash is valued higher in well-governed firms compared to poorly-governed firms. The

combination of excess cash and high expected managerial entrenchment exacerbates

agency costs, resulting in lower firm valuation, especially in firms with weaker board

structure.

Finally, we examine the effect of excess cash on subsequent operating performance,

measured by return on assets (ROA). We find that for firms that use excess cash

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holdings over the year, a larger beginning balance of excess cash results in lower

future operating performance. The negative association between future return on

assets and excess cash is mitigated in firms with high proportion of outside directors

on the board. Furthermore, the negative association between future return on assets

and excess cash is more pronounced in firms with larger boards. In addition, firms

with high expected managerial entrenchment and excess cash have lower subsequent

profitability. We also provide some evidence that when firms have both high excess

cash and high expected managerial entrenchment, (i) those with higher proportion of

outside directors on the board, and (ii) those with smaller boards, have better

subsequent operating performance. Collectively, our results indicate that the negative

association between subsequent operating performance and excess cash in firms with

expected managerial entrenchment is mitigated in firms with stronger board structure.

We contribute to the literature on cash holdings and corporate governance as follows.

First, Kalcheva and Lins (2007) find that investors discount the valuation of firms

with both high expected managerial entrenchment and high cash reserves. Thus, their

paper raises the question of what specific corporate governance mechanisms may

mitigate the negative association between firm valuation and cash reserves in firms

with high expected managerial entrenchment. Our paper directly examines this

question by providing evidence that strong board structure mitigates the valuation

discount of cash reserves in firms with high expected managerial entrenchment.

Second, Dittmar and Marht-Smith (2007) investigate how corporate governance

impacts firm value by comparing the value and use of cash holdings in US firms.

Their measures of corporate governance include the degree of managerial

entrenchment due to takeover defenses and the presence of large shareholder

monitoring. However, takeovers are infrequent in Asia and hence, managers of Asian

listed firms face little disciplinary pressure from the market for corporate control.

Furthermore, most firms in Asia are controlled by a single and large ultimate

shareholder (Claessens, Djankov and Lang 2000) and this may curb the monitoring

effectiveness of external large shareholder. We complement the findings of Dittmar

and Marht-Smith (2007) by examining the effectiveness of other corporate

governance mechanism such as board structure in constraining managerial

opportunism over cash reserves in a setting where entrenched managers are likely to

face limited disciplinary pressure from the takeover market and external large

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shareholders. Thirdly, our paper also extends prior studies that examine country-level

investor protection and cash reserves (Dittmar, Mahrt-Smith, and Servaes (2003) and.

Pinkowitz, Stulz, and Williamson (2006)) by examining the effect of firm-level

corporate governance structure on cash holdings.

The remainder of the paper is organized as follows. Section 2 reviews prior studies

and develops the hypotheses. Section 3 describes the data and method. Section 4

presents the results of our empirical tests and provides alternative specifications.

Section 5 contains the conclusions.

2. Theory and Hypothesis

2.1 Prior research

An important strand of prior literature focuses on the determinants of corporate cash

holdings. Kim et al. (1998) report that US firms with high costs of external financing,

more volatile earnings, and low profitability hold high cash. Using a sample of US

listed firms, Opler et al. (1999) provide evidence that small firms and firms with

strong growth opportunities and riskier cash flows hold larger amounts of cash.

Pinkowitz and Williamson (2001) document that the monopoly power of banks has a

significant impact on cash balance.

Another stream of research examines the association between corporate governance

structure and cash holdings. The central theme of these studies is that in firms with

high cash reserves, entrenched managers have the incentives to spend corporate

resources in negative net present value projects that harm shareholders, consistent

with the Jensens (1986) agency costs of free cash flow. Prior US research provides

mixed evidence on whether investors should be concerned with large cash reserves.

Mikkelson and Partch (2003) find that large extreme cash holdings is not associated

with poor firm performance and do not represent conflicts of interests between

managers and shareholders. However, Harford (1999) shows US firms with large cash

reserves spend more on acquisitions and those acquisitions by cash-rich firms are

value-destroying. Harford, Mansi and Maxwell (2007) find that in the United States,

firms with weaker corporate governance structures actually have smaller cash

reserves. They interpret their result as suggesting that in USA, entrenched managers

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avoid visible accumulations of excess cash because large cash stockpiles attract the

attention of shareholders and can be used to self-finance a corporate control action

against the managers. The combination of excess cash and weak shareholder rights

leads to increases in capital expenditures and acquisitions 1 and result in lower

profitability and valuations. In the US, weakly controlled managers dissipate cash

quickly on acquisitions and capital expenditures.

Research outside United States provide evidence that in firms in countries with poor

shareholder protection, managers can hoard cash and pay low dividends. Dittmar,

Mahrt-Smith, and Servaes (2003) find that corporate cash holding is negatively

associated with country-level shareholder protection. Pinkowitz, Stulz, and

Williamson (2006) find that cash is worth less to the minority shareholders of firms in

countries with low investor protection. Furthermore, they find that minority

shareholders value dividends more in countries with weak shareholder protection.

These findings are consistent with the hypothesis that poor protection of investor

rights makes it easier for management and controlling shareholders to expropriate

corporate resources for their own benefit. Using data from 31 countries, Kalcheva and

Lins (2007) find that cash holding is higher in firms with higher expected managerial

entrenchment (proxied by the managerial voting rights) and this association is

magnified when country-level shareholder protection is poor. In addition, they

document that firm values are discounted when firms with entrenched managers hold

high levels of cash, particularly when country-level shareholder protection is poor.

They also find that negative association between firm valuation and managerial

entrenchment is mitigated in firms that pay dividends and this relationship is

magnified when country-level shareholder protection is poor.

2.2 Hypothesis

Our central theme is that firms with strong corporate governance structure have low

cash holdings. Stronger corporate governance structure is associated with more

effective monitoring of managers and hence, limits managerial flexibility to spend

corporate resources on negative net present value projects. If cash facilitates

overinvestment and rent-seeking by entrenched managers, we hypothesize that firms

1They also document that US firms with weaker governance structures choose to repurchase

instead of increasing dividends, avoiding future payout commitments.

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with entrenched managers will hold more cash. A firms board of directors is

responsible for monitoring and evaluating senior management. The key determinant

of the boards effectiveness is the board structure such as board size and board

independence. Yermack (1996) finds that smaller boards are more efficient as they

provide greater decision making. Outside directors perform a corporate governance

role by mitigating managerial entrenchment and expropriation of firm resources. The

governance literature generally suggests that as boards become increasingly

independent of managers, their monitoring effectiveness increases, thereby decreasing

managerial opportunism and enhancing firm performance. Thus, we expect firms with

strong board structure have low cash holdings. Prior studies suggest that strong boards

are associated with separation of CEO and chairman positions, high proportion of

outside directors and small board size. If strong boards reduce management

propensity to hoard excessive cash, we predict that firms with higher proportion of

outside directors on the board, those with smaller board size, and those that separate

CEO and chairman of the board positions, have low cash holdings.

We also examine the effect of ownership structure of firms in determining their cash

holdings. Managers may have incentives to hold large cash balances, which enable

them to pursue their own objectives at the expense of those of shareholders by

consuming perquisites or making inefficient investment decisions (Jensen, 1986). If

greater ownership by managers can align the interests of managers and shareholders,

we expect a negative relationship between managerial ownership and cash holdings

(i.e. the incentive alignment effect). However, the impact of managerial ownership is

likely to be non-monotonic. As managerial ownership continues to increase, there is

greater degree of managerial control and entrenchment of managers (Morck et al.,

1988; McConnell and Servaes, 1990). Consequently, managers may choose to hold

more cash to pursue private benefits and hence the relationship between cash holdings

and managerial ownership can become positive at higher levels of managerial

ownership (i.e. the entrenchment effect) 2 . Thus, we predict that at low level of

2Using UK firms, Okzan and Okzan (2004) find that cash holdings fall as managerial

ownership increases up to 24%, rise as managerial ownership increases up to 64%, and fall

again when managerial ownership exceeds 64%. However, they did not find any association

between cash holdings and board structure such as board independence and board size. Theydo not investigate the impact of corporate governance structure (such as managerial

ownership and board structure) on the valuation of excess cash.

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managerial ownership, corporate cash holding is negatively associated with

managerial ownership (alignment of interest effect) but at high level of managerial

ownership, corporate cash reserves are positively associated with managerial

ownership (entrenchment effect).

Following prior studies (Morck et al., 1988; McConnell and Servaes, 1990), we posit

that high managerial equity ownership is associated with high expected managerial

entrenchment. Hence, a natural question is whether strong board structure mitigates

the negative association cash holding and expected managerial entrenchment. If board

of directors plays an effective governance role in constraining managerial private

rent-seeking activities, we predict that the negative association between excess cash

holdings and expected managerial entrenchment is mitigated in firms with stronger

board structure.

In terms of firm valuation, if excess cash is associated with higher agency costs, we

hypothesize that (i) firm valuation is negatively associated with excess cash holdings,

and (ii) the negative association between firm valuation and excess cash holdings is

mitigated in firms with stronger board structure and lower expected managerial

entrenchment, and (iii) in firms with both high cash holdings and high expected

managerial entrenchment, those with stronger board structure have higher firm

valuation.

3. Data and Method

3.1 Sample formation

We begin with the Worldscope database to identify listed firms in five Asian

countries comprising Malaysia, Philippines, Indonesia, Singapore and Thailand

during the period 2001 to 20053. We exclude financial institutions because of their

unique financial structure and regulatory requirements. We eliminate observations

with extreme values of control variables such as sales growth and leverage (discussed

in section 3.2 below). We obtain annual reports for fiscal year 2001 and 2005 from

the Global Report database and company websites. Our final sample consists of 1,061

3

In this study, we focus on the South-East Asian countries in Asia because of the high costs of manualdata collection of board and ownership variables from annual reports. Thus, our sample excludesSouth Korea, Taiwan and Hong Kong.

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firms for 4,206 firm-year observations during the period 2001 to 2005 in five Asian

countries (Malaysia, Philippines, Indonesia, Singapore and Thailand). We manually

collect data on the board characteristics such as CEO-chairman duality, board size and

the number of outside directors from the annual report. An outside director is defined

as a director who is not a current nor former employee of the firm. We also examine

the annual report to manually collect data on the number of common shares held by

the management of the firm, which we define as all executive officers and directors in

the firm such as the Chief Executive Officer, Chief Financial Officer, Chief

Operations Officer, Chief Technology Officers and Vice-Presidents4.

3.2 Cash holdings

Our first test is the association between corporate cash holdings, board characteristics

and management equity ownership.

CASHi,t = 0 + 1CEODUAL i,t-1 + 2OUTDIRi,t-1 + 3BODSIZE i,t-1

+ 4MGTOWNi,t-1 + 5MGTOWNSQi,t-1 + 6MGTOWNSQi,t-1*CEODUALi,t-1

+ 7MGTOWNSQi,t-1*OUTDIRi,t-1 + 8MGTOWNSQ i,t-1*BODSIZE i,t-1

9LOGASSETi,t-1 + 10LEVi,t-1 + 11CAPEXi,t-1 + 12NWCi,t-1 + 13CFFOi,t-1

+ 14SALEGROWi,t-1 + 15DIVi,t-1 + 16ANTIDIRi,t-1

+ Country Dummies + Year Dummies + Industry dummies (1)

All variables are defined in table 1. Subscripts i and t denote the firm and year

respectively.

Our central hypothesis is that if cash facilitates overinvestment by entrenched

managers, firms with entrenched managers will hold more cash. A firms board of

directors plays an important role in monitoring and constraining managerial

discretion. Two important attributes of boards effectiveness are board size and board

independence. The governance literature generally suggests that when boards are

smaller and when board independence increases, their monitoring effectiveness

increases, thereby decreasing managerial opportunism and enhancing firm

4If the annual report discloses the ownership of family members of management (typically in the

beneficial ownership section), we include the common stock ownership of family members in our

measure of family ownership. To the extent that disclosure of family ownership differs across thecountries, we acknowledge that our measure of management ownership is likely to be understated.However, this should bias against us from finding a result supporting our hypothesis.

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performance. Thus, we expect firms with strong board structure have low cash

holdings. Prior studies suggest that strong boards are associated with separation of

CEO and chairman positions, high proportion of outside directors and small board

size. If strong boards reduce management propensity to hoard excessive cash, we

predict the coefficients CEODUAL and BODSIZE to be positive and coefficient

OUTDIR to be negative. From Jensen and Meckling (1976), Morck, Shleifer and

Vishny (1988) and McConnell and Serveas (1990), we expect that at low managerial

equity ownership, greater managerial equity ownership is associated with lower

agency costs (alignment of interest effect) and at high managerial equity ownership,

greater managerial equity ownership is associated with higher agency costs

(entrenchment effect). If higher managerial entrenchment is associated with higher

corporate cash holdings, then the coefficients on MGTOWN and MGTOWNSQ

should be negative and positive respectively. To test whether board structure affects

the association between cash holdings and high expected managerial entrenchment

(proxied by MGTOWNSQ), we also interact MGTOWNSQ with various board

attributes. If strong board structures reduce managerial entrenchment over corporate

cash holdings, we expect the interaction term MGTOWNSQ*OUTDIR to be negative

and the interaction terms MGTOWNSQ*CEODUAL and MGTOWNSQ*BODSIZE

to be positive.

Following, Opler et. al (1999), the remaining variables are economic determinants for

holding cash such as liquidity needs, firm size, growth opportunities and capital

investment plans. First, a certain level of cash holdings is required to support the daily

operations of the firm, because cash cannot be raised instantaneously on a daily need

basis. This transactions motive suggests that the size of the firm is a key determinant.

We control for firm size with the natural logarithm of total assets (LOGASSET). To

control for potential cash substitutes, we include a measure of other, non-cash liquid

assets with working capital (NWC) used as a proxy. Other motives for holding cash

include accumulating precautionary financial slack in anticipation of new investment

opportunities when external finance is costly. Thus, we include controls for cash flow

(CFFO), investment opportunities measured by sales growth (SALEGROW), capital

expenditure needs (CAPEX), and financing needs measured by corporate leverage

(LEV) and dividend payouts (DIV). To control for the effect of country-level investor

protection on corporate cash reserves, we include the shareholder rights index from

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La Porta et. al (1998), with higher values denoting stronger shareholder rights.We

also include country indicators, year indicators and industry indicators to control for

country-specific, time trend and industry effects respectively.

3.3 Firm value

Next, we examine the association between corporate cash holdings, board

characteristics and management equity ownership.

TOBINQi,t = 0 + 1CASHi,t-1 + 2CEODUAL i,t-1 + 3OUTDIRi,t-1 + 4BODSIZE i,t-1

+ 5MGTOWNi,t-1 + 6MGTOWNSQi,t-1 + 7CEODUAL i,t-1 * CASHi,t-1

+ 8OUTDIRi,t-1 * CASHi,t-1 + 9BODSIZE i,t-1*CASHi,t-1

+ 10MGTOWN i,t-1*CASHi,t-1 + 11MGTOWNSQ i,t-1*CASHi,t-1

+ 12MGTOWNSQi,t-1*CASHi,t-1*CEODUALi,t-1

+ 13MGTOWNSQi,t-1*CASHi,t-1*OUTDIRi,t-1

+ 14MGTOWNSQi,t-1* CASHi,t-1*BODSIZE i,t-1

+ 15LOGASSETi,t-1 + 16LEVi,t-1 + 17CAPEXi,t-1 + 18CFFOi,t-1 + 19ANTIDIRi,t-1

+ Country Dummies + Year Dummies + Industry dummies (2)

All variables are defined in Table 1. Subscripts i and t denote the firm and year

respectively.

The dependent variable is firm value that is proxied by the firms market-to-book

ratio (TOBINQ). Prior studies suggest that firm value is positively associated with

strong corporate governance structures. Thus, we predict the coefficients on OUTDIR

and MGTOWN to be positive and the coefficients on CEODUAL, BODSIZE and

MGTOWNSQ to be negative. More importantly, we expect the valuation of cash

reserves will be higher in firms with stronger board structure. Thus, we predict the

coefficients on CASH*OUTDIR to be positive and the coefficients on

CASH*CEODUAL and CASH*BODSIZE to be negative. Furthermore, we predict

that in firms with high expected managerial entrenchment, the valuation of cash

reserves will be low. We predict a positive sign on the interaction CASH*MGTOWN

and a negative sign on the interaction CASH*MGTOWNSQ. Finally, in firms with

both high expected managerial entrenchment and high cash reserves, we predict that

investors will incrementally discount the valuation of those firms with weak board

structure. Hence, we predict the three-way interaction terms CASH*MGTOWNSQ*

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CEODUAL and CASH*MGTOWNSQ* BODSIZE are negative and the interaction

term CASH*MGTOWNSQ* OUTDIR is positive.

The control variables are firm size (LOGASSET), corporate leverage (LEV), growth

opportunities (CAPEX) and profitability (CFFO). We also include country indicators,

year indicators and industry indicators to control for macro-economic, time trend and

industry effects respectively.

3.4 Operating performance

As an additional test, we examine the association between cash reserves and

subsequent operating performance. Following Dittmar and Marht-Smith (2007), we

hypothesize that firms that draw down their excess cash from year t 1 to year t will

have lower operating performance if they have poor governance. Specifically, we

examine the return on assets (ROA) for the sub-sample of firms that had positive

excess cash at time t 1 and used some of it up in year t. We measure ROA as net

income before tax divided by total assets net of cash. We estimate a regression of

ROA on the level of excess cash at time t 1, governance at time t 1, and and

interaction between the two. We control for size (net assets), asset structure (PP&E

divided by net assets), lagged ROA, country effects and industry effects in these

regressions. The regression equation is given as follows.

ROAi,t = 0 + 1EXCASHi,t-1 + 2CEODUAL i,t-1 + 3OUTDIRi,t-1 + 4BODSIZE i,t-1

+ 5MGTOWNi,t-1 + 6MGTOWNSQi,t-1 + 7CEODUAL i,t-1 * EXCASHi,t-1 +

8OUTDIRi,t-1 * EXCASHi,t-1 + 9BODSIZE i,t-1*EXCASHi,t-1

+ 10MGTOWN i,t-1*EXCASHi,t-1 + 11MGTOWNSQ i,t-1*EXCASHi,t-1

+ 12MGTOWNSQi,t-1*EXCASHi,t-1*CEODUALi,t-1

+ 13MGTOWNSQi,t-1* EXCASHi,t-1*OUTDIRi,t-1

+ 14MGTOWNSQ i,t-1* EXCASHi,t-1*BODSIZE i,t-1 + 15Ln(NAi,t) + 16PPEi,t +

17ROAi,t-1 + 18ANTIDIRi,t-1

+Country Dummies + Industry dummies (3)

We estimate the ROA regression (3) on all firms that both have positive excess cash

at date t 1 and reduce their cash between t 1 and t. A negative coefficient for

excess cash (EXCASH) indicates that firms with excess cash will have lower

subsequent profitability. A positive coefficient on the interaction term between lagged

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excess cash and lagged governance indicates that for every dollar of excess cash held

at date t 1, firms with weak corporate governance who used up excess cash

experienced a lower ROA in the following year compared to firms with good

corporate governance. Thus, we predict the interaction terms EXCASH*OUTDIR

and EXCASH*MGTOWN should be positive and the interaction terms

EXCASH*CEODUAL, EXCASH*BODSIZE and EXCASH*MGTOWNSQ should

be negative. Finally, in firms with both high expected managerial entrenchment and

high cash reserves, we predict that firms with strong board structure will have higher

return on assets than those with weak board structure. Hence, we predict the three-

way interaction terms EXCASH*MGTOWNSQ*CEODUAL and

EXCASH*MGTOWNSQ*BODSIZE are negative and the three-way interaction term

EXCASH*MGTOWNSQ* OUTDIR is positive.

4. Results

4.1 Summary statistics

Table 1 reports the descriptive statistics. Cash holding has a mean of 0.124 and a

median of 0.107, with a standard deviation 0.283. Because of the skewness of the

variable, we use the log of cash holdings in our tests. In terms of financial data, the

average firm in the sample has capital expenditure to asset ratio of 0.047, leverage of

0.156, net working capital (excluding cash) to assets of 0.134, cash flow from

operations to assets of 0.122 and a one-year sales growth rate of 0.134. Turning to

board characteristics, the CEO chairs the board in 51% of the firms, the mean board

size is about 7 and the mean proportion of outside directors on the board is 47.2%.

Mean management equity ownership is 0.19.

4.2 Cash holdings

Table 2 reports the regression of cash holdings on various board attributes and

corporate ownership structure. The dependent variable is the natural logarithm of the

ratio of cash holdings to non-cash assets. In column (1), the coefficient on

CEODUAL is positive and significant at the 5% level. This result suggests that firms

with CEOs who also chair the board of directors have higher cash holdings. The

coefficient on OUTDIR is negative and significant at the 1% level. This result

suggests that firms with higher proportion of outside directors have lower cash

holdings. Collectively, these results suggest that firms with higher board

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independence (measured by the separation of the CEO and chairman of the board

positions and the proportion of outside directors on the board) have lower levels of

cash holdings. We also find that corporate cash holdings are positively associated

with board size. This result is consistent with the notion that larger boards are

associated with greater inefficiencies and coordination problems (Yermack 1996).

Taken together, our results suggest that stronger boards are associated with more

effective monitoring of managerial discretion over corporate cash holdings.

The coefficient on management equity ownership (MGTOWN) is positive but

statistically insignificant. Thus, there is no evidence of alignment of interest between

managers and shareholders at low level of managerial equity ownership. In contrast,

the coefficient on the squared term of management equity ownership (MGTOWNSQ)

is positive and significant at the 5% level, implying that in firms with high level of

managerial equity ownership, greater managerial equity ownership is associated with

higher levels of cash beyond the economic determinants of corporate cash holdings.

Because our regressions control for economic factors such as growth opportunities

that are linked to the liquidity needs of a firm, the positive association between

MGTOWNSQ and CASH indicates that at high level of managerial equity ownership,

entrenched managers may be holding more cash to maximize their own utility. This

result is consistent with the Morck, Shleifer and Vishnys (1988) argument that at

high level of managerial equity ownership, greater managerial ownership is associated

with greater managerial entrenchment. In our setting, the greater managerial

entrenchment manifests in excessive corporate cash holdings, which may potentially

lead to overinvestment in negative net present value projects5.

The control variables are generally in their predicted directions. Corporate cash

holdings are positively associated with growth opportunities (SALEGROW) and cash

flow from operations (CFFO). In contrast, corporate cash holdings are negatively

associated with capital expenditure (CAPEX), net working capital (NWC) and

dividend payments (DIV).

5We also test for non-monotonic relation between cash holding and managerial equity

ownership by including an additional cubic term for the managerial equity ownership similarto the specification in Okzan and Okzan (2004). The coefficient of the cubic term for the

managerial equity ownership is not statistically significant in all specifications.

16


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In column (2), we examine whether board structure affects the positive association

between cash holdings and expected managerial entrenchment (proxied by the

squared term of management equity ownership (MGTOWNSQ)). To accomplish this,

we interact various board characteristics and MGTOWNSQ. The interaction term

between MGTOWNSQ and CEODUAL is positive but statistically insignificant at

conventional levels. More importantly, we find that the interaction term between

MGTOWNSQ and OUTDIR is negative and significant at the 1% level. This result

suggests that the positive association between cash holdings and high levels of

management equity ownership is less pronounced in firms with higher proportion of

outside directors. Hence, greater board independence mitigates entrenched managers

propensity to hold larger cash reserves especially in firms with high expected agency

costs arising from high levels of managerial ownership. We also find that the

interaction term between MGTOWNSQ and BODSIZE is positive and significant at

the 5% level. This result suggests that the positive association between cash holdings

and high levels of management equity ownership is more pronounced in firms with

larger boards. Hence, in firms with high managerial equity ownership, those with

larger boards hold higher cash reserves. In other words, large board size exacerbates

entrenched managers ability to hold high cash reserves. Collectively, our results are

consistent with the hypothesis that firms with higher expected managerial

entrenchment, those with stronger board structures hold lower cash reserves.

4.3 Firm value

In this section, we examine the association between firm value and corporate cash

holdings. Table 3 presents the results of regressions of firm valuation on cash

holdings, board structure and ownership. Our proxy for firm value is TOBINQ, which

is measured as the market value of common equity and book value of total liabilities

divided book value of total assets. In column (1), we find that firm value is positively

associated with the proportion of outside directors on the board and negatively

associated with board size. These results are consistent with prior studies that suggest

that greater board independence and smaller boards are associated with stronger

monitoring of managers and hence higher firm valuation (Mehran 1995, Yermack

1996). Although the estimated coefficients on CEODUAL and MGTOWN are in the

predicted direction, they are not statistically significant. The coefficient of

17


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MGTOWNSQ is negative and significant at the 5% level, implying that at high level

of managerial ownership, the entrenchment effect of managerial equity ownership

dominate the incentive alignment effects, resulting in lower firm valuation. Our result

is consistent with the Morck, Shleifer and Vishnys (1988) argument that high

managerial equity ownership concentrates managerial voting rights, resulting in

greater private benefits of control.

The estimated coefficient for CASH is negative and significant at the 1% level,

indicating that firms with low cash holdings have high firm valuation. The interaction

between CASH and CEODUAL, OUTDIR or BODSIZE tests the incremental effect

of board structures on the association between firm valuation and cash reserves. The

interaction between CASH and OUTDIR is positive and significant at the 5% level,

suggesting that firm valuation is higher when firms hold higher cash reserves and

managers are subjected to stronger monitoring by outside directors. Furthermore, the

interaction between CASH and BODSIZE is negative and significant at the 1% level.

This result indicates show that having larger boards (weak governance) substantially

and significantly decreases the value of cash. The interaction between CASH and

CEODUAL is negative but insignificant. The interaction between CASH and

MGTOWNSQ is negative and significant at the 5% level, suggesting that more

entrenched managers (proxied by high level of managerial equity ownership)

substantially and significantly decreases the value of cash. Collectively, we show that

the value the stock market assigns to a dollar of cash is greater for a well-governed

firm relative to a poorly-governed firm. Our finding that there is valuation benefit to

holding cash when firm-level corporate governance is strong is broadly consistent

with the results in Pinkowitz et. al (2006) and Dittmar and Marht-Smith (2007).

In column (2), we examine how board structure affects the association between firm

valuation and cash holdings in firms with entrenched managers. To test this

hypothesis, we regress firm valuation (TOBINQ) on interactions between cash

holdings (CASH), managerial entrenchment (proxied by MGTOWNSQ), and board

characteristics (such as CEODUAL, OUTDIR or BODSIZE). We find results

consistent with our hypothesis. The stand-alone coefficient on CASH is negative and

significant (0.201, t-statistic = 4.35) and the MGTOWNSQ * CASH interaction

coefficient is negative and significant (0.985, t-statistic = -2.09). The negative

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interaction coefficient indicates that investors discount the cash held by firms with

managers that are expected to be entrenched. Further, the three-way interaction

between MGTOWNSQ, CASH and OUTDIR has a positive and significant

coefficient (0.746, t-statistic =2.40). This coefficient indicates that investors

incrementally discount the value of firms with high cash and entrenched managers

when board monitoring by outside directors is weak. These results are economically

significant as well. For a firm with the mean CASH ratio of 0.12, a decline in the

proportion of outside directors on the board (OUTDIR) from 0.64 to 0.30 and a rise in

managerial equity ownership (MGTOWN) from the 25th percentile (0.09) to the 75th

percentile (0.35) corresponds to a 0.017 decline in TOBINQ6. With a mean sample

TOBINQ of 1.386, this corresponds to a 1.2% reduction in TOBINQ on average.

The three-way interaction between MGTOWNSQ, CASH and BODSIZE has a

negative and significant coefficient (-0.032, t-statistic =-2.06). This coefficient

indicates that in firms with both high cash and entrenched managers, firm valuation is

lower when board size is higher. These results are economically significant as well.

For a firm with the mean CASH ratio of 0.12, an increase in board size (BODSIZE)

from 5 to 9 and a rise in managerial equity ownership (MGTOWN) from the 25th

percentile (0.09) to the 75th percentile (0.35) corresponds to a 0.0152 decline in

TOBINQ 7 . With a mean sample TOBINQ of 1.386, this corresponds to a 1.1%

reduction in TOBINQ on average.

6The MGTOWNSQ * CASH coefficient shows that a change in managerial equity ownership

from 0.09 to 0.35 is associated with a 0.01352 lower TOBINQ value (-0.985 x [ (0.35)2

-

(0.09)2

] x 0.12 = 0.01352). The MGTOWNSQ * CASH * OUTDIRcoefficient shows that

a change in managerial equity ownership from 0.09 to 0.35 for an average-cash-level firm

from a firm with OUTDIR of 0.30 corresponds to a 0.00348 lower TOBINQ value compared

to a similar firm from OUTDIR of 0.64 = (0.746 x 0.12 x [ (0.35)2 - (0.09)2 ] x (0.30-0.64 ) =

-0.0034. Summing up, the net effect is a reduction in TOBINQof 0.017 (= 0.01352 -0.0034)

7The MGTOWNSQ * CASH coefficient shows that a change in managerial equity ownership

from 0.09 to 0.35 is associated with a 0.01352 lower TOBINQ value (-0.985 x [ (0.35)2

-

(0.09)2

] x 0.12 = 0.01352). The MGTOWNSQ * CASH * BODSIZE coefficient shows

that a change in managerial equity ownership from 0.09 to 0.35 for an average-cash-level firm

from a firm with BODSIZE of 9 corresponds to a 0.00176 lower TOBINQ value compared to

a similar firm from BODSIZE of 5 = (0.032 x 0.12 x [ (0.35)2

- (0.09)2

] x (0.30-0.64 ) = -

0.00176. Summing up, the net effect is a reduction in TOBINQ

of 0.0152 (= 0.

01352 -0.00176).

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Excess cash

In the previous analysis, we focus on the total cash, and we show that (i) poorly

governed firms have higher cash holdings and (ii) investors discount firms with high

cash holdings when corporate governance is weak. As a robustness test, we extend

our measure of cash to consider the effects of governance on the valuation of excess

cash. Following Dittmar and Smith (2007), we define excess cash as cash held by

firms that is not needed for firm operations or investments. Total cash does not

account for the fact that managers may be less likely to waste cash resources needed

for daily operations. As in Dittmar and Smith (2007), we define excess cash as the

cash held above a predicted optimal (or necessary) level of cash. We estimate this

optimal level using a regression of cash on variables that proxy for legitimate

reasons firms hold cash such as investment opportunities, hedging needs and

availability of alternative sources of liquidity. Following the regression specifications

for an optimal cash regression in prior literature (Opler, Pinkowitz, Stulz, and

Williamson, 1999; Dittmar, Mahrt-Smith, and Servaes, 2003; Dittmar and Smith

(2007)), we estimate the optimal cash regression as follows:-

Ln(CASH) = 0 + 1Ln(NA) + 2FCF + 3NWC + 4SALEGROW + Year Dummies

+ Country Dummies + Industry dummies (4)

Where CASH = cash divided by net assets.

NA = total assets less cash.

FCF = (cash flow less capital expenditure less interest expense) divided by net assets

NWC = (current assets less current liabilities less cash divided) by net assets

SALEGROW = prior year sales growth.

The residuals from the above equation are used to compute excess cash.

Table 4 presents the results of regressions of firm valuation on excess cash and

corporate governance measures. Our results are qualitatively similar. For parsimony,

we focus our analysis based on the results in column (2). Firm valuation is positively

associated with excess cash. The interaction term OUTDIR and EXCASH is positive

and significant. Thus, in firms with excess cash, investors assign higher valuation to

those firms with higher proportion of outside directors. The interaction term

BODSIZE and EXCASH is negative and significant, suggesting that firm values are

lower when firms have higher level of excess cash and larger board size. The

interaction term MGTOWNSQ and EXCASH is negative and significant, implying

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that when managers are entrenched, investors discount firm value in firms with high

excess cash reserves. The three-way interaction between MGTOWNSQ, EXCASH

and OUTDIR is positive and significant. Thus, the negative association between firm

value and excess cash in firms with entrenched managers is mitigated by the

proportion of outside directors on the board. In other words, greater monitoring

associated with higher board independence reduces the valuation of excess cash in

firms with high expected managerial entrenchment. Moreover, the three-way

interaction between MGTOWNSQ, EXCASH and BODSIZE is negative and

significant. Thus, the negative association between firm value and excess cash in

firms with entrenched managers is more pronounced when firms have larger board of

directors. Stated differently, in firms with excess cash, large boards exacerbate agency

costs associated with managerial entrenchment8.

4.4 Operating performance

We now examine the operating performance of all firms that both have positive

excess cash at year t-1 and reduce their cash between year t-1 and year t. This sub-

sample of firms represents firms with excess cash beyond their normal needs and then

subsequently spend their cash during the year. We focus on this sub-sample to test the

influence of governance on the value of cash reserves not needed for operations and

investments. Table 5 presents the results of estimating regression (3) that was

previously discussed in section 3. In column (1), the coefficient on the stand-alone

lagged excess cash (EXCASHi,t-1) shows that for firms that use excess cash holdings

over the year, a larger beginning balance of excess cash results in lower future

operating performance. The interaction OUTDIRi,t-1 * EXCASHi,t-1 is positive and

significant, suggesting that the negative association between future return on assets

and beginning balance of excess cash is mitigated in firms with high proportion of

outside directors on the board. The interaction BODSIZEi,t-1 * EXCASHi,t-1 is negative

8 Kalcheva and Lins (2008) find that negative association between firm valuation and managerial

entrenchment is mitigated in firms that pay dividends. Thus, as a robustness check of the mitigatingrole of dividends, we include the interaction between our proxy for managerial entrenchment and

dividend payout measured as dividend paid divided by net profit after tax. Consistent with Lins andKalcheva (2008), we also find that dividend payout mitigates the negative association between firm

valuation and managerial entrenchment. More importantly, our primary result - stronger boardstructure (i.e. smaller boards and higher board independence) mitigates mitigates the negative

association between firm valuation and managerial entrenchment continues to hold.

21


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and significant, suggesting that the negative association between future return on

assets and beginning balance of excess cash is more pronounced in firms with larger

boards. We also document that subsequent operating performance deteriorates in

firms with high excess cash and high expected managerial entrenchment, as evidenced

by the negative interaction term MGTOWNSQ i,t-1 * EXCASHi,t-1.

In column (2), we extend our model to test whether the negative association between

subsequent operating performance and excess cash in firms with expected managerial

entrenchment is mitigated by stronger board structure. Specifically, the positive and

significant coefficient on the three-way interaction term (MGTOWNSQi,t-1*

EXCASHi,t-1*OUTDIRi,t-1 ) suggests that in firms with high excess cash and high

expected managerial entrenchment, those with higher proportion of outside directors

on the board have better subsequent operating performance. Furthermore, there is

some evidence that in firms with high excess cash and high expected managerial

entrenchment, subsequent operating performance worsens when such firms have

larger boards, as evidenced by the negative and significant coefficient on the three-

way interaction term (MGTOWNSQi,t-1* EXCASHi,t-1* BODSIZE i,t-1 ) Collectively,

our results indicate that the negative association between subsequent operating

performance and excess cash in firms with expected managerial entrenchment is

mitigated in firms with stronger board structure.

5. Conclusions

In this study, we examine the relation among cash holding, corporate governance

structures and firm valuation. Using a large sample of listed firms in five Asian

countries (Malaysia, Philippines, Indonesia, Singapore and Thailand), we find that

firms with higher board independence, smaller boards, and higher expected

managerial entrenchment, have lower cash holdings. Our results are consistent with

Jensens (1986) theory that the conflicts between managers and shareholders over the

deployment of corporate resources are higher when firms have larger free cash flow.

In poorly governed firms, self-interested managers pursue private benefits of control

by holding excessive cash and overspending cash on value-destroying projects. We

find that the negative association between cash holdings and managerial entrenchment

is mitigated by stronger board structures. Specifically, in firms with higher expected

22


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managerial entrenchment, those with higher proportion of outside director on the

board and smaller board size have lower cash holdings.

We document that firm value is negatively associated with cash levels. The negative

association between firm value and cash holdings is more pronounced in firms with (i)

lower proportion of outside directors, (ii) larger boards and (iii) higher expected

managerial entrenchment. These results suggest that agency costs of free cash flow

are exacerbated when corporate governance structure is weak, resulting in additional

decline in firm valuation. Finally, we find that in firms with both high cash holdings

and high expected managerial entrenchment, investors additionally discount the

valuation of firms with lower proportion of outside directors and those with larger

boards. Our results are qualitatively similar using subsequent profitability as a

measure of firm performance. Firms with higher excess cash have lower subsequent

profitability. The negative association between subsequent profitability and cash

holdings is more pronounced in firms with weaker board structure.

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References

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Shleifer, A., Vishny, R., 1986. Large shareholders and corporate control. Journal of Political

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Table 1

Descriptive statistics

Mean 25th

percentile

Median 75th

percentile

Standard

deviation

CASH 0.124 0.021 0.107 0.259 0.283

LOGASSET 11.352 10.345 11.137 12.172 1.366

CAPEX 0.047 0.012 0.028 0.063 0.052

LEV 0.156 -0.009 0.136 0.304 0.205

NWC 0.134 -0.0148 0.121 0.289 0.223

CFFO 0.122 0.006 0.052 0.106 0.834

SALEGROW 0.134 -0.055 0.075 0.232 0.387

DIV 0.661 0 1 1 0.473

TOBINQ 1.386 0.634 1.185 1.544 1.018

ROA 0.032 0.002 0.041 0.087 0.106

CEODUAL 0.509 0 1 1 0.485

OUTDIR 0.472 0.302 0.457 0.640 0.233

BODSIZE 7.455 5 8 9 3.181

MGTOWN 0.194 0.092 0.120 0.353 0.172

ANTIDIR 3.759 2 3 4 1.362

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Table 1 (continued)

Variable definitions

CASH = Cash and short-term investments divided by net assets. Net

assets are total assets minus cash and short term investments

LOGASSET = Natural logarithm of total assets.

CAPEX = Capital expenditure divided by total assets.

LEV = (Total debt less cash ) divided by total assets

NWC = Net working capital divided by net assets. Net working

capital is current assets less cash and equivalents less current

liabilities.

CFFO = Cash flow from operations divided by total assets.

SALEGROW = On-year sales growth rate.

DIV = A dummy variable that equals one if the firm pays dividend in

the fiscal year and zero otherwise.

TOBINQ = Market value of equity plus book value of total liabilities

divided by total assets.

ROA = Net income before tax divided by total assets.

CEODUAL = A dummy variable that equals one if the CEO is also the

chairman of the board and zero otherwise.

OUTDIR = Proportion of outside directors on the board where an outside

director is defined as a director who is not a current nor

former employee of the firm.

BODSIZE = Total number of directors on the board.

MGTOWN = Proportion of common equity held by the executive officers

and directors in the firm.

MGTOWNSQ = Squared term of MGTOWN.

ANTIDIR = Country-level shareholder protection from LaPorta et. Al

(1998) with higher values denoting stronger shareholder

protection.

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Table 2

Regression of cash holdings on board structure and management ownership

The sample consists of 1,061 firms for 4,206 firm-year observations during the period

2001 to 2005 in five Asian countries (Malaysia, Philippines, Indonesia, Singapore and

Thailand). The dependent variable is the natural logarithm of CASH, measured as the

ratio of cash to non-cash assets. All variables are defined in Table 1. All models

include country, year and industry indicators and an intercept term (not tabulated). T-

statistics based on clustered standard errors at the firm level are reported in

parentheses below the coefficient. *,** and *** indicate significance at the 10%, 5%

and 1% respectively.

Sign 1 2

CEODUAL + 0.086

(2.56)**

0.081

(2.45)**

OUTDIR - -1.006

(-4.09)***

-0.980

(-3.84)***BODSIZE + 0.0484

(3.72)***

0.046

(4.30)***

MGTOWN - 0.223

(0.62)

0.221

(0.63)

MGTOWNSQ + 0.868

(3.10)***

0.851

(2.97)***

MGTOWNSQ * CEODUAL + 0.279

(1.47)

MGTOWNSQ * OUTDIR - -0.175

(-3.78)***

MGTOWNSQ * BODSIZE + 0.206(-2.19)**

LOGASSET + 0.002

(0.18)

0.008

(0.59)

LEV - -2.049

(-8.64)***

-2.166

(-9.18)***

CAPEX - -0.051

(-0.21)

-0.645

(-2.44)**

NWC - -0.545

(-6.75)***

-0.568

(-3.19)***

CFFO + 0.004(1.49) 0.003(1.17)

SALEGROW + 0.075

(2.53)**

0.028

(0.95)

DIV - -0.093

(-2.73)***

-0.086

(-2.52)**

ANTIDIR - -0.041

(-2.02)**

-0.038

(-1.86)*

Number of observations 4,223 4,223

R-squared 0.175 0.192

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Table 3

Regression of firm value on cash holdings and corporate governance structuresThe sample consists of 1,061 firms for 4,206 firm-year observations during the period 2001 to

2005 in five Asian countries (Malaysia, Philippines, Indonesia, Singapore and Thailand). The

dependent variable is firm value (TOBINQ), computed as market value of equity plus book

value of total liabilities divided by total assets. All variables are defined in Table 1. Allmodels include country, year and industry indicators and an intercept term (not tabulated). T-

statistics based on clustered standard errors at the firm level are reported in parentheses below

the coefficient. *,** and *** indicate significance at the 10%, 5% and 1% respectively.

1 2

CASH - -0.231

(-3.95)***

-0.201

(-4.35)***

CEODUAL - 0.167

(0.45)

0.145

(0.12)

OUTDIR + 0.089

(2.25)**

0.092

(2.01)**

BODSIZE - -0.004(-1.85)*

-0.004(-1.84)*

MGTOWN + 0.217

(0.31)

0.112

(0.16)

MGTOWNSQ - -0.067

(-2.01)**

-0.055

(-2.12)**

CEODUAL * CASH - -0.188

(-0.54)

-0.189

(-0.55)

OUTDIR* CASH + 0.886

(2.13)**

0.817

(2.09)**

BODSIZE* CASH - -0.479

(-2.86)***

-0.356

(-2.65)***MGTOWN * CASH + 0.005

(0.06)

0.020

(0.19)

MGTOWNSQ * CASH - -0.873

(-2.05)**

-0.985

(-2.09)**

MGTOWNSQ * CASH * CEODUAL - 0.328

(0.94)

MGTOWNSQ * CASH * OUTDIR + 0.746

(2.40)***

MGTOWNSQ * CASH * BODSIZE - -0.032

(-2.06)**LOGASSET + 0.064

(1.77)*

0.044

(1.26)

CAPEX + 2.197

(3.24)***

3.591

(5.45)***

LTD - 0.966

(0.62)

1.365

(1.16)

CFFO + 0.017

(4.03)***

0.013

(3.79)***

ANTIDIR + 0.0815

(2.13)**

0.0627

(2.02)**

Number of observations 4,206 4,206R-squared 0.062 0.087

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Table 4

Regression of firm value on excess cash holdingsThe sample consists of 1,061 firms for 4,206 firm-year observations during the period 2001 to 2005 infive Asian countries (Malaysia, Philippines, Indonesia, Singapore and Thailand). The dependentvariable is firm value (TOBINQ), computed as market value of equity plus book value of totalliabilities divided by total assets. EXCASH is the excess cash based on the residuals computed in

equation (4). All variables are defined in Table 1. All models include country, year and industryindicators and an intercept term (not tabulated). T-statistics based on clustered standard errors at thefirm level are reported in parentheses below the coefficient. *,** and *** indicate significance at the10%, 5% and 1% respectively.

1 2

EXCASH - -0.087

(-2.71)***

-0.072

(-2.24)**

CEODUAL - -0.009

(-0.11)

-0.015

(-0.17)

OUTDIR + 0.179

(2.11)**

0.164

(2.02)**

BODSIZE - -0.011(-1.78)*

-0.012(-1.29)

MGTOWN + 0.532

(0.46)

0.463

(0.59)

MGTOWNSQ - 0.112

(-2.01)**

-0.121

(-2.08)**

CEODUAL * EXCASH - 0.089

(0.19)

0.085

(0.17)

OUTDIR* EXCASH + 0.068

(1.98)**

0.885

(2.06)**

BODSIZE* EXCASH - -0.452

(-2.25)**

-0.356

(-2.17)**

MGTOWN * EXCASH + 0.047

(0.35)

0.034

(0.25)

MGTOWNSQ* EXCASH - -0.739

(-2.86)***

-0.816

(-2.71)***

MGTOWNSQ * EXCASH * CEODUAL - -0.299

(-0.75)

MGTOWNSQ * EXCASH * OUTDIR + 0.157

(2.59)***

MGTOWNSQ * EXCASH * BODSIZE - -0.204

(-2.20)**LOGASSET + 0.079

(1.03)

0.062

(0.38)

CAPEX + 2.629

(2.87)***

1.819

(2.12)**

LTD - 0.871

(0.70)

0.253

(0.65)

CFFO + 0.701

(1.12)

0.372

(0.36)

ANTIDIR + 0.605

(1.93)*

0.581

(1.91)* Number of observations 4,206 4,206R-squared 0.073 0.085

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Table 5

Regression of subsequent operating performance on excess cash holdings.

The sample consists of 1,153 firm-year observations during the period 2001 to 2005

in five Asian countries (Malaysia, Philippines, Indonesia, Singapore and Thailand)

that have both positive excess cash in year t-1 and subsequently reduce their cashholdings between year t-1 to year t. The dependent variable is return on assets (ROA),

computed net income before tax divided by total assets. EXCASH is the excess cash

based on the residuals computed in equation (4). All variables are defined in Table 1.

All models include country, year and industry indicators and an intercept term (not

tabulated). T-statistics based on clustered standard errors at the firm level are reported

in parentheses below the coefficient. *,** and *** indicate significance at the 10%,

5% and 1% respectively.1 2

EXCASH t-1 - -0.003

(-2.29)**

-0.002

(-2.13)**

CEODUAL t-1 - 0.002(0.29)

0.004(0.51)

OUTDIRt-1 + 0.104

(2.29)**

0.101

(3.20)***

BODSIZE t-1 - -0.004

(-2.03)**

-0.005

(-2.01)**

MGTOWN t-1 + -0.011

(-0.12)

0.008

(0.11)

MGTOWNSQ t-1 - -0.091

(2.17)**

-0.089

(-2.28)**

CEODUAL t-1 * EXCASH t-1 - -0.044

(-1.02)

-0.048

(-1.10)

OUTDIRt-1* EXCASH t-1 + 0.019

(3.22)***

0.018

(2.93)***

BODSIZE t-1* EXCASH t-1 - -0.430

(-2.03)**

-0.417

(-3.12)***

MGTOWN t-1* EXCASH t-1 + 0.175

(1.36)

0.226

(0.87)**

MGTOWNSQ t-1* EXCASH t-1 - -0.139

(-2.03)**

-0.132

(-2.10)**

MGTOWNSQ t-1* EXCASH t-1* CEODUAL t-1 - 0.002

(0.25)

MGTOWNSQ t-1* EXCASH t-1* OUTDIRt-1 + 0.003

(2.08)**MGTOWNSQ t-1 * EXCASH t-1* BODSIZE t-1 - -0.129

(-1.77)*

LOG(NA) t + 0.006

(2.59)***

0.011

(2.93)**

PPE t + 0.054

(1.26)

0.038

(0.72)

ROA t-1 - 0.119

(2.40)**

0.117

(2.35)**

ANTIDIR + 0.317

(0.82)

0.502

(1.28)

Number of observations 1,153 1,153

R-squared 0.231 0.0254

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