Financial Constraints, Corporate Governance and Corporate Cash Holdings: Evidence from Thai Market
Post by MSF Chula at Saturday, 30 January 2021 03:37 PM

The objectives of this paper are to examine the relationship between corporate governance and financial constraints which play a substitution role in mitigating agency conflicts associated with corporate cash holdings of Thai listed companies covering the period from 2008 to 2019. I use five firm-specific characteristics of financial constraints i.e. annual payout ratio, firm size, leverage ratio, lifecycle ratio as well as collateral asset ratio, and corporate governance score as proxies to determine the level of cash holdings.

The result shows that financially constrained firms hold a larger amount of cash than financially less-constrained firms in order to have adequate financial cash slack for the unanticipated situation. This is consistent with the study of Opler et al. 1999.

Besides, an interesting finding is that corporate governance helps financially less-constrained firms to mitigate agency conflicts in corporate cash holdings. This is also consistent with the study of Harford et al. (2008) suggesting that stronger governance will reduce agency conflict because shareholders can ensure that they will be better protected their wealth so they will allow firms to hold a larger amount of cash holdings.

Moreover, my paper confirms that financially less-constrained firms further develop corporate governance mechanisms rather than financially constrained firms. This result is consistent with Luo (2011) in that they tend to improve their corporate governance score in order to enforce stronger discipline on managers. Therefore, my paper suggests that the effectiveness of corporate governance strongly interrelates with financial constraints on corporate cash holdings in Thailand.

Last updated at Saturday, 30 January 2021 03:37 PM