Corporate governance and the value of cash holdings |
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Authors: | Amy Dittmar Jan Mahrt-Smith |
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Institution: | 1. University of Michigan, 701 Tappan Street, Ann Arbor, MI, 48109, USA;2. University of Toronto, 105 St. George Street, Toronto, Ont., Canada, M5S 3E6 |
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Abstract: | 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. |
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Keywords: | G30 G32 G34 |
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