Corporate cash hoarding and corporate governance mechanisms: evidence from Borsa Istanbul

ABSTRACT

Hoarding cash can create conflicts of interest between managers and shareholders that lead to an agency conflict. Corporate governance is a mechanism to overcome agency conflicts. Thus, this study aims to examine the effect of corporate governance mechanisms on the corporate decision to hoard cash. The study focuses on the BIST100 nonfinancial firms listed on the Borsa Istanbul during the period from 2010 to 2014. It finds that firms with smaller boards of directors and larger audit committees are likely to hoard less cash. However, firms with a large percentage of independent directors are likely to hoard more cash. This study also finds that when the CEO of a firm acts as the chairman of the board, the firm tends to hoard more cash. Further, the study finds that firms audited by a big auditor are more likely to hoard less cash than firms audited by a non-big auditor. These results suggest that firms with good corporate governance mechanisms (except for the percentage of independent directors) are likely to hoard less cash to reduce agency conflicts.

KEYWORDS:

• Corporate cash hoarding
• corporate governance
• Turkey

Acknowledgments

** This paper has been benefited from the useful comments and suggestions made by the review committees and participants of the British Accounting and Finance Association (BAFA) annual conference (April 2018, UK) and 17^th IFIP conference (October 2018, Kuwait).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The executive compensation may also create an agency problem. Thus, a firm is assumed to structure the incentives and compensation schemes in a manner that encourages managers to maximize corporate shareholder value. Bebchuk, Cremers, and Peyer (2011) find that the higher the CEO pay slice, the higher the agency problem. On the other hand, firms may use equity grants to the CEO to manage the optimal level of equity compensations (Core and Guay 1999). Prior research (e.g. Bergstresser and Philippon 2006) also finds that managers’ equity-based compensations are associated with higher firm performance. Likewise, Li (2014) investigates the effect of mutual monitoring on the agency problem. He finds that the existence of mutual monitoring in a firm is positively associated with its future value, and mutual monitoring could be used as a substitute for other corporate governance mechanisms. Overall, the results suggest that mutual monitoring can be used to mitigate the agency problem.

2. There are a number of factors that can affect the cash hoarding. For instance, Bhuiyan and Hooks (2019) argue that the existence of problem directors in a firm reduces the quality of its corporate governance that may encourage holding excess cash. Boubakri, El, and Saffar (2013) argue that large firms with politically connected directors may promote their strategy of holding lower levels of cash than non-political firms in order to reduce political costs. Moreover, Orens and Reheul (2013) propose that competition in the market is a major factor in determining risk preference and thus affects the cash holding. Furthermore, Hu, Lian, and Zhou (2019) report that social values (religion; particularly Protestant belief) also affect corporate cash hoarding.

3. Following prior studies (e.g. Atif, Huang, and Liu 2019; Al-Najjar, 2013; Ferreira and Vilela 2004; Gill and Shah 2011; Ozkan and Ozkan 2004b; Harford, Mansi, and Maxwell 2012) the size of a firm is measured using the natural logarithm of a firm’s total assets at the end of the current year. This measure is considered a robust measure for the size of a firm in the finance literature (Dang, Li, and Yang 2018).