Corporate governance and cash holdings: the way forward

Abstract

Purpose This study aims to provide a review of corporate governance and cash holdings because strong corporate governance is necessary for the efficient utilization of firm’s liquid resources such as cash, to minimize the agency cost of high cash holdings and to improve the value of cash. Design/methodology/approach The author provides a literature review of corporate governance and cash holdings through a conceptual and theoretical argument rather than empirical research. Findings The author reviews empirical and theoretical work surrounding key corporate governance variables and identifies avenues for future research. The author finds that corporate governance mechanisms and cash holdings have received much attention during the last two decades. However, the significant role of corporate governance (both country-level and the firm-level) in controlling the entrenched behavior of the managers is discussed separately in the literature. The combined effect of both country-level and the firm-level governance is lacking in the cash holdings literature. Additionally, this study has found that much attention is paid to the developed markets, only a few focused on the developing markets regarding cash holding literature although, the agency problems are high in developing markets. Originality/value The study contributes to the growing literature on corporate governance and cash holdings and provides a further understanding of the role of governance in minimizing the agency cost to increase value by assuring that firms’ assets are used efficiently and productively in the best interests of investors and other stakeholders. In addition, it provides a new idea to the policies maker and future researchers where they need to do more work.