Effect of Corporate Governance on Cash Holding: The Role of Product Market Competition

Abstract

Corporate cash holding is among the fundamental areas in corporate finance. Recently, corporate cash holding has gained critical attention due to the dynamic business environment. Both practitioners and academicians have focused on the firms’ cash holding decisions in the recent era. The purpose of this research is to investigate the effect of corporate governance on cash holding and to check the role of product market competition on corporate governance and cash holding relationship. The research investigated that whether product market competition plays substitution role for corporate governance in a relationship with cash holding. Substitution effect argument claims that external market discipline is enough to resolve agency problem between managers and shareholders even firm level governance is weak. For this study, unbalanced panel data of 196 companies from the year 2006 to 2014 is selected. All models include time dummies and industry fixed effect with standard error cluster to the firm. The results show that corporate governance has a significant negative effect on corporate cash holding which supports flexibility hypotheses. Moreover, product market competition has substitution role for corporate governance in relationship with corporate cash holding.