Firm diversification and the value of corporate cash holdings

This paper studies the effect of firm diversification on the value of corporate cash holdings. We develop two hypotheses based on efficient internal capital market and agency problems. We find that the value of cash is lower in diversified firms than in single-segment firms, and that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms. We find that firm diversification has a negative (zero) impact on the value of cash among firms with a lower (higher) level of corporate governance. These findings are consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems.     

The effect of financial reporting quality on corporate dividend policy

This study examines how financial reporting quality affects corporate dividend policy. We find that higher quality reporting is associated with higher dividends. This positive association is more pronounced among firms with more severe free cash flow problems and among firms with higher ownership by monitoring-type institutional investors. Further analysis of the relation between reporting quality and under?/over-payment of dividends suggests that reporting quality largely mitigates underpayment of dividends. Additionally, both a granger causality test and a difference-in-difference analysis of dividend changes around a quasi-exogenous reporting event yield evidence consistent with the direction of causality going from financial reporting to dividends. Overall, these findings are consistent with financial reporting quality acting as a governance mechanism that induces managers to pay dividends by disciplining free cash flow problems. Our findings support the view that dividends are the result of enhanced monitoring (Jensen 1986; La Porta, Lopez-de-Silanes, Shleifer, and Vishny 2000).     

Corporate Governance and Capital Structure Dynamics

We develop a dynamic tradeoff model to examine the importance of manager–shareholder conflicts in capital structure choice. In the model, firms face taxation, refinancing costs, and liquidation costs. Managers own a fraction of the firms’ equity, capture part of the free cash flow to equity as private benefits, and have control over financing decisions. Using data on leverage choices and the model's predictions for different statistical moments of leverage, we find that agency costs of 1.5% of equity value on average are sufficient to resolve the low‐leverage puzzle and to explain the dynamics of leverage ratios. Our estimates also reveal that agency costs vary significantly across firms and correlate with commonly used proxies for corporate governance.     

Corporate governance norms and practices

We evaluate the impact of corporate governance on the valuation of firms in a large cross-section of countries. Unlike previous work, we differentiate between minimally accepted governance attributes that are satisfied by all firms in a given country and governance attributes that are adopted at the firm level. This approach allows us to differentiate between firm-level and country-level corporate governance, thus contributing to an ongoing debate in the literature about whether governance attributes are largely determined by country factors or firm characteristics. Despite the costs associated with improving corporate governance at the firm level, we find that many firms choose to adopt governance provisions beyond those that are adopted by all firms in the country, and that these improvements in corporate governance are positively associated with firm valuation. Firms that choose not to adopt sound governance mechanisms tend to have concentrated ownership and sizeable free cash flow, consistent with agency theories based on self-interested managers and controlling shareholders. Our results indicate that the market rewards companies that are prepared to adopt governance attributes beyond those required by laws and common corporate practices in the home country.     

Corporate codes of ethics and cash holdings: International evidence

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.     

Does geography matter? Firm location and corporate payout policy

We investigate the impact of geography on agency costs and firm dividend policies. We argue that remote firm location increases the cost of shareholder oversight of managerial investment decisions. We hypothesize that remotely located firms facing free cash flow problems precommit to higher dividends to mitigate agency conflicts. We find that remotely located firms pay higher dividends. As expected, the effect of geography on dividends is most pronounced for firms with severe free cash flow problems. Further, remotely located firms rely more on regular dividends instead of special dividends or share repurchases and decrease dividends less often.     

The impact of state ownership on performance differences in privately-owned versus state-owned banks: An international comparison

This paper examines how government ownership and government involvement in a country’s banking system affect bank performance from 1989 through 2004. Our study uncovers an interesting pattern of changing performance differences between state-owned and privately-owned banks around the Asian financial crisis. We find that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001, and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system. In addition, from 1997 to 2000, the 4-year period after the beginning of the Asian financial crisis, the deterioration in the cash flow returns, core capital, and credit quality of state-owned banks was significantly greater than that of privately-owned banks, especially for the countries that were hardest hit by the Asian crisis. However, state-owned banks closed the gap with privately-owned banks on cash flow returns, core capital, and nonperforming loans in the post-crisis period of 2001–2004. Our findings can best be explained by Shleifer and Vishny’s [Shleifer, A., Vishny, R.W., 1997. A survey of corporate governance. J. Finance 52, 737–783] corporate governance theory on state ownership of firms and Kane’s [Kane, E.J., 2000. Capital movement, banking insolvency, and silent runs in the Asian financial crisis. Pacific-Basin Finance J. 8, 153–175] life-cycle model of a regulation-induced banking crisis.     

Types of agency cost,corporate governance and liquidity

We study the relationship between governance and liquidity when the agency costs of entrenched management and self-serving controlling shareholders are present. Using a sample of Chinese firms, we show a positive relationship between governance and liquidity. We also find striking differences between firms faced with different types of agency conflicts. Specifically, governance measures such as management compensation, controlling shareholder monitoring and board independence are more effective in lowering the bid-ask spread for state-owned enterprises prone to management entrenchment. In contrast, multiple-layer corporate structures and a higher degree of separation between control and cash flow rights are associated with higher bid-ask spreads in non-state firms characterized by self-serving controlling shareholders. Our study highlights how governance might have different liquidity effects between firms faced with different types of agency conflicts.     

A Direct Test of the Free Cash Flow Hypothesis: Evidence from Real Estate Transactions

This paper tests (Jensen The American Economic Review, 76, 323–329 1986) free cash flow hypothesis using data on real estate transactions. We find that firms with either higher free cash flow or higher cash reserve pay more fore real estate, which is consistent with the free cash flow hypothesis. We also find that the agency costs of free cash flow associated with real estate transactions are more severe when firms have lower Tobin’s Q. Furthermore, we find that among the commonly used corporate governance measures, only equity compensation is effective in mitigating the agency problem of free cash flow.     

Agency Cost,Dividend Policy and Growth: The Special Case of REITs

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.     

Do corporate governance mechanisms matter for cash holdings and firm value?

This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.     

Corporate cash holdings and CEO compensation incentives

We examine the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance the alignment of manager and shareholder interests could influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and, therefore, require greater liquidity.     

Parent-subsidiary investment layers and the value of corporate cash holdings

Our study investigates whether agency costs arising from organizational structure in terms of the number of investment layers which connect the parent firm and its lowest-tiered subsidiaries within the corporate pyramid are associated with the value of cash holdings. Using a sample of Taiwanese publicly traded firms, we find that a change of a dollar in cash holdings is associated with less than a dollar change in market value. In line with our expectation, we find that the marginal value of cash decreases with the number of investment layers, supporting the agency theory of excess cash holdings. We also find that the negative association between the number of layers and the value of cash holdings is stronger for firms with high deviation between cash flow and voting rights and for family-controlled firms.     

How creditor rights affect the value of cash: A cross-country study

We examine how legal protection of creditors affects the value of cash across countries. We find that the marginal value of cash is considerably higher in countries with weak creditor rights. Creditor rights are at least as relevant as shareholder rights, which other studies have found to be an important factor affecting various corporate policies. In addition, we find that marginal investment is more valuable for firms in countries with weak creditor rights. This combines the findings of previous studies that weak creditor protection makes firms financially constrained and that cash is more valuable for financially constrained firms. Subsample analysis suggests that financial constraints generated by weak creditor rights create underinvestment among cash starved firms but alleviate agency conflicts among cash rich firms. Further analysis reveals that good country governance complements laws protecting creditors in cash valuation.     

自由现金流量创造力与违约风险——来自A股公司的经验证据

本文基于我国A股上市公司数据,研究了企业自由现金流量创造力与违约风险之间的关系。研究发现:(1)企业自由现金流量创造力越强,其违约风险越低。经过一系列稳健性检验后,该结论依旧成立。(2)自由现金流量创造力越强的企业往往有更低的债务规模、更高的资产收益率和更低的股票波动,因而其违约风险更低。(3)自由现金流量创造力与违约风险的负相关关系,主要存在于货币政策紧缩时期以及外部信息环境较差的企业。本文发现意味着,监管部门和投资者应重视上市公司自由现金流量创造力不足所带来的潜在债务违约风险,通过不断提高公司自由现金流量创造力,助力我国宏观经济与微观企业高质量发展。     

An Ohlson valuation framework for valuing corporate governance: The case of Taiwan

We examine the relation between a firm's market value, financial performance, and corporate governance as a cointegrated system in the Ohlson (1995) valuation framework. Using a comprehensive set of 29 governance measures in 4 categories for Taiwanese firms, we find that governance related to ownership structure and divergence between cash flow rights and control rights are important for a firm's market valuation. In particular, information about shareholdings of board directors and supervisors, shareholdings of controlling family, and voting rights are influential for firm value. Controlling for book value and residual incomes in the model, these governance measures track much of the remaining firm valuation that is unrelated to a firm's financial performance. Our findings provide some insight into the intrinsic value of corporate governance and the types of corporate governance mechanisms that are especially important for firms with similar ownership structure and controls.     

Form versus substance: The effect of ownership structure and corporate governance on firm value in Thailand

We examine the relation between the quality of corporate governance practices and firm value for Thai firms, which often have complex ownership structures. We develop a comprehensive measure of corporate governance and show that, in contrast to conventional measures of corporate governance, our measurement, on average, is positively associated with Tobin’s q. Furthermore, we find that q values are lower for firms that exhibit deviations between cash flow rights and voting rights. We also find that the value benefits of complying with “good” corporate governance practices are nullified in the presence of pyramidal ownership structures, raising doubts on the effectiveness of governance measures when ownership structures are not transparent. We conclude that family control of firms through pyramidal ownership structures can allow firms to seemingly comply with preferred governance practices but also use the control to their advantage.     

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. 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.     

Over-investment of free cash flow

This paper examines the extent of firm level over-investment of free cash flow. Using an accounting-based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms’ governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment.     

Corporate Governance and Agency Conflicts

I investigate whether corporate governance is associated with the level of agency conflicts in firms. I employ exploratory principal components analysis on 22 individual governance variables to obtain seven factors that represent the different dimensions of governance for a firm. I measure the level of agency conflicts in firms based on seven proxies for agency conflicts used in the literature. I find that firms with greater agency conflicts have better governance mechanisms in place, particularly those related to the board, audit committee, and auditor. I also find that the composition and functioning of the board, the independence of the auditor, and the equity‐based compensation of directors are significantly associated with firm performance, but primarily for firms with high agency conflicts. Overall, the results support the theory that the existence and role of various governance mechanisms in a firm are a function of the level of agency conflicts in the firm.