Corporate governance and the value of cash holdings

We investigate how corporate governance impacts firm value by comparing the value and use of cash holdings in poorly and well-governed firms. We show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88...

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Bibliographic Details
Published in:	Journal of financial economics 2007-03, Vol.83 (3), p.599-634
Main Authors:	Dittmar, Amy, Mahrt-Smith, Jan
Format:	Article
Language:	eng
Subjects:	Business studies Cash flow Cash holdings Cash management Corporate finance Corporate governance Data analysis Economic impact Firm value Ownership Ownership structure Studies Take-over provisions Take-overs Valuation
Online Access:	Get full text
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Summary:	We investigate how corporate governance impacts firm value by comparing the value and use of cash holdings in poorly and well-governed firms. We show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88. Good governance approximately doubles this value. Furthermore, we show that firms with poor corporate governance dissipate cash quickly in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed.
ISSN:	0304-405X 1879-2774