Abstract
Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the U.S., weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.
Full Bibliographic Citation:
Harford, J., Mansi, S.A., Maxwell, W.F., 2008. Corporate governance and firm cash holdings in the U.S. Journal of Financial Economics 87, 535–555. Reprinted with permission from Elsevier Science B.V.
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Notes
- 1.
Additional evidence by La Porta et al. (2000) supports the conjecture that higher shareholder rights are associated with higher dividend payouts.
- 2.
In a contemporaneous paper, John and Knyazeva (2006) make a similar argument to explain why U.S. firms with low shareholder rights pay higher dividends, a result also shown here.
- 3.
For a complete description on the construction of the GIndex see Gompers et al. (2003).
- 4.
For robustness, we also include two additional variables, namely, the number of business segments the firm operates in and a dividend payout ratio, and find consistent results. We do not tabulate the corresponding findings.
- 5.
We exclude the year 1990 from our analysis since our insider holdings data starts in the year 1992.
- 6.
To minimize survivorship bias, we allow firms to exit and reenter the data set.
- 7.
We use GIndex quartiles because of sample size when looking within size quintiles.
- 8.
In a prior version of the paper, we estimated all of our models correcting for serial and autocorrelation using a Newey and West (1987) procedure, which Petersen (2006) finds to be upwardly biased. While correcting for clustered errors resulted in the reduced t-statistics reported in this version of the paper, the results remain significant.
- 9.
Kerkorian’s 1995 tender offer for Chrysler was explicitly to be partly financed by the $8 billion in cash reserves that Chrysler had accumulated. Because U.S. law allows the debt of an acquiring shareholder to be assigned to the acquired company, this is possible.
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Acknowledgements
The authors would like to thank Tom Bates, Murillo Campello, Mike Cliff, Amy Dittmar, Kathy Kahle, Sandy Klasa, Scott Lee, Karl Lins, Ed Rice, Jan Mahrt-Smith, Laura Starks, Mike Weisbach, an anonymous referee, and seminar participants at the 2006 American Finance Association Meetings and Penn State University for their helpful comments and suggestions. Harford gratefully acknowledges the support of the UW CFO Forum and the Reimers and McCabe fellowships. Mansi acknowledges receipt of partial funding from Virginia Tech’s summer support. The remaining errors are the sole responsibility of the authors.
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Harford, J., Mansi, S.A., Maxwell, W.F. (2012). Corporate Governance and Firm Cash Holdings in the U.S.. In: Boubaker, S., Nguyen, B., Nguyen, D. (eds) Corporate Governance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-31579-4_5
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