Corporate Governance and Cash Holdings Empirical Evidence ... · The average cash holding for Taiwanese listed firms is more than doubles from 1990 to 2011. This study examines the

Corporate Governance and Cash Holdings: Empirical Evidence

from an Emerging Market

I-Ju Chen

Division of Finance, College of Management

Yuan Ze University, Taoyuan, Taiwan

Bei-Yi Wang

Division of Finance, College of Management

Yuan Ze University, Taoyuan, Taiwan

JEL classifications: G30; G34 Keywords: Cash holdings, Ownership structure, Board structure, Information transparency

___________________ Address correspondence to I-Ju Chen, Division of Finance, College of Management, Yuan Ze University, 135, Far-East Rd., Chung-Li, Taoyuan, Taiwan. Tel:+886-3-4638800ext.3664; Fax:+886-3-4354624; e-mail:[email protected]. I-Ju Chen acknowledges the funding from the National Science Council in Taiwan (NSC 101-2410-H-155-021 and 102-2410-H-155-003-MY2).

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Corporate Governance and Cash Holdings: Empirical Evidence from an Emerging Market

Abstract

The average cash holding for Taiwanese listed firms is more than doubles from

1990 to 2011. This study examines the relationship between firm-level corporate

governance metrics and cash holding. We construct our hypotheses based on the agency

motive of cash holding. We employ ownership structure, board attributes, and information

transparency as proxies for the nature of corporate governance for Taiwanese firms. Firms

with higher divergence between control and cash flow rights, unaffiliated, and not

controlled by families, are more inclined to accumulate cash. In addition, firms with higher

board independence and smaller board size tend to hold more cash. Firms with higher

information transparency will actually have larger cash reserves. Our evidence suggests that

corporate governance structures are important in determining cash holdings for Taiwanese

publicly-traded firms.

Key words: Cash holdings, Ownership structure, Board structure, Information transparency

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Corporate Governance and Cash Holdings: Empirical Evidence from an Emerging Market

1. Introduction

In the wake of financial tsunami, investors lose confidence of holding financial assets,

and companies realize the importance of cash flow management. In this situation, people

will choose to hoard more cash reserves to protect themselves from future cash flow

uncertainty. This also raises the question that what factors determine the corporate cash

holdings. Corporate cash holding is an important factor in a firm’s assets. Many studies

explore the determinants of corporate cash holdings (Bates et al., 2009; Harford et al., 2008;

Kim et al., 1998; Opler et al., 1999; Ozkan and Ozkan, 2004). From transaction and

precautionary motives, firms hold more cash to protect themselves against future cash flow

uncertainty if the costs of external financing are high (Almeida et al., 2004; Han and Qiu,

2007; Opler et al., 1999). From the tax motive viewpoint, Foley et al. (2007) find that U.S.

multinational corporations that incur larger tax expenses with repatriating foreign earnings

are more likely to accumulate cash. Agency theory suggests that corporations in countries

with weak shareholder protection have higher cash holdings (Dittmar et al., 2003; Pinkowitz

et al., 2006). Their results indicate that entrenched managers are more likely to hoard cash

rather than make dividend payments to shareholders. Moreover, the value of cash holdings

is worth less when agency problems are severe (Dittmar and Mahrt-Smith, 2007; Pinkowitz

et al., 2006).

A recent study states that there is a secular increase in the cash holdings of U.S. firms

from 1980 to 2006 (Bates et al., 2009). Bates et al. (2009) investigate why average cash

ratios for U.S. firms are more than doubles during the sample period. Their results show that

the main reasons for this dramatic increase are that net working capital has fallen, cash flow

volatility has increased, capital expenditures have decreased, and R&D expenditures have

improved. Moreover, following Jensen (1986), we would expect that firms with agency

problems will hoard cash if they do not have good investment opportunities and the

entrenched managers do not want to return cash to shareholders. However, Bates et al.

(2009) find no evidence that agency problems contribute to the increase in cash ratios for

U.S. firms. Therefore, this study provides empirical tests of the influence of agency

problems on cash holdings in Taiwanese firms.

Several corporate governance issues are prominent in Asia according to Claessens and

Fan (2002). First, they report that corporate ownership is highly concentrated in Asian

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corporations, unlike U.S. firms, whose shares are widely held. This indicates that typical

Asian corporations are tightly held by one or several members. More importantly, the

company is often affiliated with a business group controlled by the same family. This

implies that the family effectively controls the firms via pyramid structures and

cross-holdings, making the identification of the controlling owners are complicated task

(Claessens et al., 2000). Furthermore, voting rights of controlling owners frequently exceed

cash flow rights in Asian corporations. Second, compared with U.S. firms, internal

governance mechanisms such as board structures are weak in Asian markets. Yeh (2002)

document that boards of directors are often dominated by insiders, and hardly have outsider

existence in Taiwan. A single leadership structure (the chairman of the board is also the

CEO) is generally present in Taiwan corporations. Third, Asian firms typically have lower

levels of transparency and disclosure quality, which may be the outcome of poor corporate

governance (Fan and Wong, 2002). They argue that this low level of transparency is related

to agency problems and relationship-based transactions.

Although high ownership concentration is common among Asian corporations, the

extensiveness of the cross-shareholding or pyramid structures is quite popular in Taiwan

(Yeh, Lee and Woidtke, 2001). Further, the degree of shareholder protection in Taiwan is

much lower than countries in U.S. and U.K., which suggests that managers are less likely to

concern with shareholder wealth and make decisions that destroy firm value (Dittmar et al.,

2003)., Many countries in Asia concerned over corporate governance since the Asian crisis

in 1997, and Taiwan authorities imposed the corporate governance best-practice principles

in 2002 and launched information transparency and disclosure rankings system in 2003 to

strengthen corporate governance practices. This motivates us to explore whether managerial

incentives affect firms’ cash holdings and how governance influences the level of cash

holdings for Taiwanese publicly traded firms.

While previous studies focus on the determinants of cash holding for U.S. firms, we

examine ownership structure, board attributes, and information transparency as proxies for

the nature of corporate governance for Taiwanese firms. The specific proxies for ownership

structure are divergence between ownership and control rights, group affiliation, and family

control. We hypothesize that firms with divergence between ownership and control rights

will have higher cash holding. Following substantial literatures, we hypothesize that the

influence of group affiliation and family control on cash holding is ambiguous. Based on the

board structure, we contend that firms accumulate more cash when the proportion of

independent directors on the board is higher, and the chairman of the board is also the CEO

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(single leadership structure). In addition, we hypothesize that the relationship between

board size and cash holding is ambiguous. The final hypothesis is that firms with a higher

level of information transparency will have lower cash holding.

We construct our sample using the Taiwan Economic Journal (TEJ) database for the

period 1990 to 2011. In the empirical analysis, we employ several alternative definitions of

the cash ratio, including (1) cash to total assets; (2) cash to net assets (where net assets

equals book assets minus cash); (3) current assets to total assets; and (4) current assets to net

assets. The explanatory variables that we use follow our hypotheses and are motivated by

specific corporate governance issues in Asia. The control variables follow Opler et al.

(1999). Using various proxies for the nature of corporate governance, we run regressions to

estimate the determinants of cash holding in Taiwan.

We first find that there is a secular increase from 1990 to 2011 in the average cash ratio

for Taiwanese publicly traded firms. The average cash to total assets is more than doubles

over the sample period. In univariate comparisons, we find that firms with higher cash

holding are less likely to be group-affiliated, and not controlled by families. For the board

structure of high cash balances firms, the board size is smaller and more independent

directors are involved in the boards. In addition, these high cash balances firms tend to have

higher degree of information transparency compared to firms with low cash balances.

Furthermore, we find that firms with high divergence between control and cash flow rights

are more likely to accumulate cash in univariate analysis. However, we find no evidence

that firms with single leadership structure are associated with more cash holdings.

The remainder of this paper is organized as follows. In Section 2, we briefly review the

theoretical determinants of cash holding and the literature on the relationship between cash

holding and agency problems. In Section 3 we develop the hypotheses. We describe our

sample and research design in Section 4. Section 5 discusses the empirical results of the

univariate investigation and regression estimations. Section 6 concludes.

2. Literature review

2.1 Studies on cash holding

A substantial literature discusses the determinants of cash holding. Opler et al. (1999)

provide comprehensive reviews of the determinants of corporate cash holding for publicly

traded firms in the U.S. They find evidence supportive of a tradeoff model of cash holding,

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indicating that firms trade off the costs and benefits of holding cash and determine the

optimal cash balances. In addition, several studies have examined the different factors

affecting corporate cash policy for the U.S. firms. Foley et al. (2007) show that firms with

higher tax costs when repatriating earnings appear to increase cash holding. Han and Qiu

(2007) find that cash flow volatility has a positive impact on cash holding for financially

constrained firms, while this relationship does not exist for unconstrained firms. Faulkender

and Wang (2006) investigate the marginal value of cash holdings that arises from

differences in corporate financial policy. Their results show that the marginal value of cash

declines with more cash holding, higher leverage, and better access to capital markets. A

more recent study, Bates et al. (2009) document that there is a secular increase in the cash

holdings of U.S. firms, and they find evidence supportive of precautionary motive for this

increase.

Opler, Pinkowitz, Stulz, and Williamson (1999) examine the determinants and

implications of corporate cash holding. They consider two explanations for cash holding:

the tradeoff theory and the financing hierarchy theory. The tradeoff theory suggests that

firms trade off the costs and benefits of holding cash to determine optimal cash levels. In

this context, they consider the transaction costs motive, the effect of asymmetric

information, and the agency costs of external financing inducing a demand for cash holding.

The costs of holding cash includes the cost-of-carry and possible tax disadvantages.

However, there are two benefits from holding cash. First, firms can avoid the transaction

costs involved in raising external funds and do not have to liquidate assets to make

payments. Second, firms can reserve cash to hedge against the risk of future cash shortfalls.

Keynes (1936) describes the first benefit as the transaction motive for cash holdings, and

the second one as the precautionary motive. However, the financing hierarchy theory

suggests that there is no optimal amount of cash. This theory suggests that when firms have

sufficient cash flow to finance new investment, they repay debts and accumulate cash.

Conversely, when firms lack the internal funds to finance investment, they reduce their

accumulated cash and issue debt. Therefore, managers are indifferent to holding cash and

taking on debt, and cash reserves are the residuals of the investment and financing decisions

(Dittmar et al., 2003). In order to test these theories, they construct a sample of publicly

traded U.S. firms from 1971 through 1994.

The regression results provide evidence for the tradeoff theory. Firms hold more cash

when they are smaller, have higher investment and R&D expenditures, better investment

opportunities, more volatile cash flows, and lower net working capital. These are

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characteristics that either increase the cost of cash shortfalls or increase the cost of outside

funds. These findings imply that both transaction costs and the precautionary motive are

important factors in the tradeoff theory.

Foley et al. (2007) examine the impact of taxes on cash holding, a topic that has

received less attention in previous literatures. Specifically, they test the hypothesis that the

magnitude of cash holding is partly associated with the tax burden of repatriations. The

sample covers the period 1982 to 2004 for US firms. According to Opler et al. (1999), they

use the natural logarithm of the ratio of cash to net assets as their main dependent variable.

Their empirical results show that firms with higher tax costs when repatriating earnings

appear to increase cash holdings. This result is robust across different measures of the

repatriation tax burden, as well as across different levels of cash holding and changes in

cash holding. Moreover, the tax burden of repatriations makes firms hold more cash abroad.

However, their results lack the evidence to conclude that firms facing a higher repatriation

tax burden hold less cash domestically. They further test whether affiliates in countries with

high repatriation tax costs hold more cash than other affiliates of the same firm. Their

empirical results confirm this contention. Financially constrained firms hold less cash, and

their cash holdings are less sensitive to repatriation tax costs. Finally, the sensitivity of cash

holdings to repatriation taxes is particularly pronounced for technology-intensive firms.

Han and Qiu (2007) provide a direct analysis of the interaction between a firm’s

precautionary cash holding, cash flow uncertainty, and financial constraints. They propose

that there is a positive relationship between cash holding and future cash flow volatility for

financially constrained firms because these firms are sensitive to cash flow volatility and

tend to accumulate cash reserves for precautionary savings. The sample consists of U.S.

publicly traded companies from 1997 to 2002 using quarterly information. Their theoretical

model is based on that of Almeida et al. (2004) which investigate whether changes in the

expected value of future cash flows contribute to a firm’s cash holding behavior with a

perfect external hedging market. In order to test this hypothesis, they separate firms into

financially constrained and unconstrained groups, based on four indices (firm size, dividend

payout, debt rating, and commercial rating), and use cash flow volatility as the main

explanatory variable. They then run regressions for the financially constrained and

unconstrained firms respectively.

The results indicate that cash flow volatility has a significantly positive impact on the

cash holdings of financially constrained firms, consistent with the predictions of the model.

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However, this relationship does not exist for unconstrained firms. In other words, the

intertemporal trade-off gives constrained firms the incentive to accumulate precautionary

savings when cash flow risks cannot be fully diversified.

Faulkender and Wang (2006) investigate whether corporate financial policy has an

effect on the cross-sectional variation in the marginal value of cash holdings. Their data

consists of 87,127 firm-years over the period 1971 to 2001. They construct three hypotheses.

First, as a firm increases the level of its cash position, the value of an additional dollar of

cash decreases. Second, in firms with high leverage, an extra dollar of cash holdings is less

valuable for shareholders than in firms with low leverage. Third, in financially constrained

firms, an extra dollar of cash holdings is more valuable to shareholders. In order to test

these hypotheses, they run regressions to estimate the excess equity return on the changes in

cash holdings, a firm’s profitability, financing policy, and investment policy over the fiscal

year.

The findings for cash level and leverage are consistent with the first two hypotheses,

suggesting that firms with little cash on hand are likely to raise external funds and receive

the highest benefits from additional internal funds. The marginal value of cash decreases

with the level of leverage. The authors also find that shareholders value the marginal dollar

of cash higher in constrained firms than in unconstrained firms, supporting the third

hypothesis.

Bates, Kahle, and Stulz (2009) investigate the reasons for the secular increase in the

cash holdings of U.S. firms from 1980 to 2006. They first sort firms based on different

criteria to see whether this increase concentrates among certain firms. The results show that

the secular increase in cash ratios concentrates among firms that do not pay dividends and

among firms in industries that experience a large increase in cash flow volatility, supporting

the precautionary motive. Moreover, they also find that firms in more recent IPO listing

cohorts are more likely to experience an increase in cash ratios, which is consistent with the

evidence in Brown and Kapadia (2007). After showing that there is a dramatic increase in

cash ratios, they test the reasons for that increase. Based on the model developed by Opler,

Pinkowitz, Stulz, and Williamson (1999), they find that the main reasons for the increase in

cash holdings are that net working capital has fallen, cash flow volatility has increased,

capital expenditures have decreased, and R&D expenditures have improved. Furthermore,

they also examine whether agency problems could explain this secular increase for U.S.

firms. Using the GIM index measured as managerial entrenchment and a valuation

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regression developed by Fama and French (1998), the results show that there is no evidence

that agency problems contribute to the increase in cash ratios.

2.2 Relationship between cash holdings and the agency problem

Several studies have tested an agency cost explanation for cash holdings. The agency

costs hypothesis suggests that entrenched managers in firms with high free cash flow are not

willing to pay out cash to shareholders when firms have poor investment opportunities, and

thus increase cash holdings. Dittmar et al. (2003) and Kalcheva and Lins (2007) examine

the importance of corporate governance in determining cash holding with an international

sample. They find that firms in countries with poor shareholder protection significantly have

higher cash holdings, which supports the agency costs hypothesis. Similar results are found

in Pinkowitz et al. (2006), who use institution quality and financial development as proxies

for corporate governance. Dittmar and Mahrt-Smith (2007) and Harford, Mansi, and

Maxwell (2008) provide evidence indicating that firms with weaker corporate governance

hold smaller cash reserves because the entrenched managers hoard excess cash and spend

excess cash quickly. Kusnadi (2011), investigating firms in Singapore and Malaysia,

suggests that managers of firms with a pyramidal ownership structure and controlled by

families are more likely to accumulate cash.

Dittmar, Mahrt-Smith, and Servaes (2003) examine the relationship between corporate

governance and cash holdings. Following Opler et al. (1999), they discuss two views of

cash holdings: the tradeoff model and the financing hierarchy model. In addition, they

examine whether the cash holding of a firm depends on the level of shareholder protection.

Their sample includes more than 11,000 firms from 45 countries in 1998. They first

compare average cash holdings across countries using a variety of shareholder protection

and capital market development measures. They then run pooled regressions to investigate

the determinants of cash holdings across countries.

Dittmar, Mahrt-Smith, and Servaes (2003) also find that corporations in countries

where shareholders enjoy less protection have significantly higher cash holdings. Moreover,

other determinants of cash holding, such as investment opportunities and asymmetric

information, appear to be less important in these countries. The empirical results show that

firms hold more cash when it is easier to raise funds in countries with poor shareholder

protection, which is consistent with the importance of agency costs. There is no evidence

that managers hold more cash simply because it is more difficult to access capital markets in

countries with poor shareholder protection. In sum, firms hold less cash in countries where

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shareholders enjoy greater rights and when external capital markets are highly developed,

which supports the agency costs hypothesis.

Kalcheva and Lins (2007) revisit the theoretical arguments on agency problems. They

construct three hypotheses based on the previous literatures. First, firms with entrenched

managers will hold more cash, particularly when country-level shareholder protection is

poor. Second, a firm’s value will be lower when entrenched managers hold high levels of

cash, especially when country-level shareholder protection is weak. Third, when firms with

entrenched managers pay dividends in countries with poor investor protection, firm value

will be higher. The sample consists of 5,102 firms from 31 countries in 1996. Moreover,

they construct three measures of managerial entrenchment. The first is the percentage of

control rights held by the management group and its family. The second variable is a

dummy variable that equals one when the management group and its family is the largest

blockholder of a firm’s control rights. The final variable is also a dummy variable equaling

one when the management control rights exceed other blockholders’ control rights by 20%.

For country-level shareholder protection, they use the measure for anti-director rights of La

Porta et al. (1998). In order to test the hypotheses, they run regressions using cash holdings

and Tobin’s Q as the main dependent variables.

The results of the analysis of Kalcheva and Lins (2007) show that outside investors

discount the value of cash holding when firms have entrenched managers and investor

protection against expropriation is weak. They also find that dividend payments enhance

firm value when managerial agency problems exist. In sum, these findings are consistent

with their hypotheses.

Pinkowitz, Stulz, and Williamson (2006) examine two theories about the determinants

of cash holdings across countries. The first is the tradeoff theory, which suggests that

shareholder-wealth maximizing managers face different tradeoffs, while the second is the

agency costs theory, which argues that large shareholders in countries with poor investor

protection have incentives to make decisions that expropriate private benefits from control.

These two theories predict that firms hold more cash in countries with poor institutions and

financial development. The sample spans 35 countries from 1988 to 1999. Using the method

of Fama and MacBeth (1973), they run cross-sectional regressions for each year and the

time series coefficients are used to make inferences. The primary dependent variable in the

regression is excess cash holdings and the independent variables are country characteristics.

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The results of the analysis of Pinkowitz, Stulz, and Williamson (2006) show that the

determinant of cash holdings is consistent with both theories, indicating that cash holdings

are negatively related to the quality of institutions and financial development. Furthermore,

firms in countries with higher GDP per capital hold more cash. In other words, cash

holdings of firms are positively related to economic development. They further examine the

relation between the cash holdings of a firm and the value of that firm. The results show that

the cash holding of firms in countries with poor institutions are worth less to minority

shareholders than firms in countries with better institutions, which indicates that agency

costs play an important role in how minority investors value cash held by corporations.

Dittmar and Mahrt-Smith (2007) investigate how corporate governance has an impact

on the value and eventual use of cash reserves. They examine the potential value destruction

because of negligence and profusion in the management and how good corporate

governance helps to prevent it. Next, they investigate whether poorly governed firms

dissipate excess cash more quickly, while well-governed firms control their cash better.

Their sample includes all US publicly traded firms from 1990 to 2003. For corporate

governance data, they focus on internal and external measures, including the degree of

managerial entrenchment due to takeover protection and large shareholder monitoring. The

methodology follows that of Faulkender and Wang (2005) and estimates the impact of

changes in cash holdings on changes in firm value. The results show that the value of a

dollar of cash is greater for a well-governed firm than a poorly-governed firm, indicating

that governance has a substantial impact on firm value through cash holdings.

Furthermore, Dittmar and Mahrt-Smith (2007) investigate how governance affects the

level and use of excess cash. Based on Jensen (1986), they hypothesize that poorly

governed firms dissipate cash more quickly than well-governed firms, spending cash in

ways that reduce the firm’s accounting returns and operating performance. The empirical

results are consistent with this hypothesis. They further find that governance affects cash

policy via the decision to use excess cash but not by the decision to accumulate it. In short,

poorly governed firms waste cash and thus destroy firm value.

Harford, Mansi, and Maxwell (2008) examine how firm governance affects the use of

cash. They start with a sample of 11,645 firm-year observations for 1872 firms in the US.

They use a number of corporate governance measures to gauge the firm’s agency costs,

including a GIndex of antitakeover provisions, ownership concentration (insider and

institutional), compensation to top management (pay sensitivity), and board structure (size

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and independence). Using these governance metrics, they find that firms with weaker

corporate governance actually have smaller cash holdings. They further test the relation

between investment decisions and corporate governance. They find that firms with poor

corporate governance increase investments through acquisition and capital expenditures but

reduce R&D investment when they allocate excess cash. Furthermore, how firms choose to

distribute their excess cash to shareholders also depends on their governance. The payout

results show that firms with weaker governance choose to repurchase instead of increasing

dividends, indicating that such firms want to avoid making future payouts.

Harford, Mansi, and Maxwell (2008) also examine whether the difference in

investment and payout decisions is reflected in future profitability. Their results show that

there is a positive relationship between shareholder rights and profitability. This relation is

more pronounced when combined with excess cash holdings. This indicates that firms with

low shareholder rights and excess cash have lower profitability and valuations because these

firms’ managers choose to spend cash quickly on acquisitions and capital expenditures,

rather than hoard it.

Kusnadi (2011) examines the relationship between firm-level corporate governance

and cash holdings, along with their combined effects on firm value, for firms in Singapore

and Malaysia. Different from previous studies, he uses board attributes and measures of

ownership concentration as proxies for a firm’s internal governance. According to Claessens

et al. (2000), they suggest that most companies in East Asia are organized into

family-controlled groups and that the families maintain ultimate control of the firms via

pyramid structures or cross-holding. Specifically, the separation of cash flow and control

rights in a pyramidal ownership structure results in both an incentive effect and an

entrenchment effect. The author thus predicts that an increase in the incentive effect is

associated with smaller cash holdings, while an increase in the entrenchment effect is

related to larger cash holdings. For the valuation implications of cash holdings, he

hypothesizes that firms with poor internal governance and hold large amounts of excess

cash are likely to have a negative firm value. The sample consists of 276 listed firms in

Singapore and Malaysia covering the period from 2000 to 2005. The board attributes

include board size, single leadership structure, and the proportion of independent

non-executive directors on each firm’s board. A single leadership structure means that the

chairman of the board and the CEO are the same person. The measures of ownership

concentration consist of insider ownership, and two dummy variables are created to mark

firms with insider ownership exceeding the 20% threshold and those with a pyramidal

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ownership structure. In order to test the hypotheses, he runs regressions using the natural

logarithm of the ratio of cash and cash equivalents to net assets and the ratio of market

value of equity plus total liabilities to net assets as the main dependent variables.

The results show that managers of firms with a pyramidal ownership structure and

family-controlled firms are more likely to accumulate cash reserves, supporting the

entrenchment effect. In addition, the incremental value of holding excess cash is found to be

negative for firms with a single leadership structure, firms with a pyramidal ownership

structure, and family-controlled firms. In sum, the board characteristics and ownership

concentration are important determinants of cash holding for firms in Singapore and

Malaysia.

Pinkowitz, Stulz, and Williamson (2006) investigate whether the value of corporate

cash holdings is lower in countries with weaker investor protection due to the greater ability

of controlling shareholders to extract private benefits from cash holdings in these countries,

a contention of agency theories. They further examine that investors value dividends in

countries with poor investor protection at a premium because in such countries investors

expect the cash to be partly consumed as private benefits. The sample consists of 35

countries for the period 1988 to 1998. In order to test the hypotheses, they follow a

valuation regression which is developed by Fama and French (1998). Instead of having a

continuous measure of investor protection, they split the whole sample in half each year and

use a dummy variable that equals one in countries with above-median investor protection.

They measure investor protection using a corruption index obtained from an international

country risk guide and an anti-director index based on LLSV (1998). The corruption index

assesses the risk of corruption for high government officials. It indicates that countries with

rampant corruption are those with poor investor protection. The anti-director index values

from zero to six, where countries with a value of six are those with the best protection of

minority shareholder rights. Moreover, they take GDP per capita as a measure of economic

development since measures of investor protection are highly correlated with economic

development. Based on the regression results, they find that cash contributes significantly

greater to firm value in countries with better investor protection and the dividend payout is

worth more in weak investor protection countries, strongly supporting these hypotheses. In

sum, agency problems truly play an important role in firm value across countries.

3. Hypotheses

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3.1 Ownership structure

3.1.1 Divergence between ownership and control rights

The definition of ownership in this study relies on cash-flow rights, and control relies on

voting rights based on a chain of literatures (Claessens et al., 2000; Claessens et al., 2002). La

Porta et al. (1999) and Claessens et al. (2000) show that the controlling shareholders of

publicly traded firms are often able to control a firm’s operations with a relatively small stake

in its cash-flow rights in most countries. This situation will exacerbate the entrenchment

effect (Claessens et al., 2002; La Porta et al., 1999). The entrenchment effect indicates that

higher managerial ownership may entrench managers, as they are increasingly less subject to

control by board of directors and to discipline by the market (Morck et al., 1988). Thus, when

the divergence between ownership and control increases, controlling shareholders have the

incentive to expropriate wealth by seeking personal benefits at the expense of minority

shareholders (Bebchuk et al., 2000; Harris and Raviv, 1988; La Porta et al., 1999; Shleifer

and Vishny, 1997). Kuan et al. (2011) further find that there is a positive relationship between

the divergence between ownership and control rights and cash holding. Therefore, we predict

that an increase in the entrenchment effect is associated with larger cash holdings:

H1a. Firms with greater divergence between ownership and control rights will have higher

cash holdings.

3.1.2 Group affiliation

The evidence to date on the benefits and costs of group affiliation is mixed. Compared

to independent firms, group affiliation is associated with greater use of internal factor

markets, including financial markets. Khanna & Palepu (2000) and Shin & Park (1999)

argue that the internal financial markets within a business group enable member firms with

the best projects to obtain resources when a country’s external capital markets are not well

developed. The internal markets can provide funds to firms that have better growth

opportunities, but which are financially constrained. In addition, the internal financial

markets can reduce transaction costs. Based on these benefits of group affiliation,

group-affiliated firms may choose to hoard less cash than unaffiliated firms.

However, Claessens et al. (2006) empirically examine the benefits and agency costs of

group affiliation for a large sample in East Asian countries. They find that there are gains

from group affiliation but that agency problems are important in shaping the benefits and

costs of group affiliation. Indeed, the tunneling hypothesis emphasizes the agency problem

between controlling shareholders and minority shareholders within group affiliated firms. It

contends that a business group has the potential to make controlling shareholders pay more

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attention to their own wealth but pay less attention to minority shareholders when corporate

governance is weak (Bae et al., 2002; Bertrand et al., 2002). Bae et al. (2002) find that

acquisitions by Korean business groups (chaebols) are used as a way for controlling

shareholders to increase their own wealth at the expense of minority shareholders,

consistent with the tunneling hypothesis. Bertrand et al. (2002) also find that groups in India

are used by controlling shareholders to “tunnel” resources away from minority investors,

suggesting that firms with large controlling shareholder may channel corporate resources to

benefit themselves but provide little benefits to minority owners. Following the tunneling

hypothesis, we infer that group-affiliated firms tend to have serious agency problems and

consequently hold more cash reserves.

H1b. The relationship between group affiliation and cash holding is ambiguous.

3.1.3 Family control

Family-controlled firms are prevalent in many East Asian countries (Claessens et al.,

2000). Yeh et al. (2001) find that the interest conflict between controlling and minority

shareholders within family-controlled firms is severe among Taiwanese listed firms. They

argued that the average control by the family shareholders is high enough to influence a

firm’s decision making; therefore, they force the firm to adopt policies that satisfy their

personal interests rather than those of the minority shareholders. Kuan et al. (2011) and

Ozkan and Ozkan (2004) further find that family-controlled firms hold higher levels of cash

than nonfamily-controlled firms.

However, following Chrisman et al. (2007), Chrisman et al. (2004), and Fama and

Jensen (1983), family-controlled firms typically monitor and provide incentives to family

managers, thus mitigating agency problems between managers and shareholders. Compared

to nonfamily-controlled firms, family members hold substantial ownership in their companies,

thus have strong incentives to monitor management in order to protect their interests

(Anderson and Reeb, 2003). Furthermore, family members intend to have a strong

commitment to their firms. This will lead to success in enhancing their wealth and the

reputation of their companies. As a result, families are more likely to curb wasteful

expenditures, which in turn mitigate the agency cost of cash holdings.

H1c. The relationship between family control and cash holdings is ambiguous.

3.2 Board structure

3.2.1Board independence

A generally accepted perspective is that outside (non-executive) directors are appointed

14

to act in the shareholders’ interests (Rosenstein and Wyatt, 1997; Mayers et al., 1997) and

outside directors have incentives to effectively monitor management decision-making (Fama

and Jensen, 1983). Therefore, independent directors could mitigate managerial entrenchment

and expropriation of firm resources, which implies that firms with more outside directors can

reduce agency problems between managers and shareholders. Thus, we argue that firms with

a higher proportion of independent directors on the board have lower cash holdings:

H2a. A higher level of board independence is associated with smaller cash holdings.

3.2.2 Board size

The literature for the impact of board size on agency problems is mixed. Previous

studies suggest that increased board size has two different effects: greater monitoring and less

efficient decision-making. Jensen (1993) and Yermack (1996) suggest that smaller boards are

more efficient, as decision making becomes slower when more people are involved. It

implies that smaller board is associated with stronger board structure, and thus reduces the

agency problems.

On the contrary, Harris and Raviv (2006) find that larger boards provide better

monitoring services when managers’ opportunities to expropriate private benefits are high.

Moreover, Kusnadi (2011) finds that the relationship between board size and cash holding is

negative for the samples in Singapore and Malaysia.

H2b. The relationship between board size and cash holdings is ambiguous.

3.2.3 Leadership structure

Studies by Baliga et al. (1996) and Tsui et al. (2001) show that a dual leadership

structure (where the CEO is not also the chairman) offers more effective control than a single

leadership structure. Jensen (1993) argued that the combination of CEO and chairman

positions leads to less monitoring of top management and thus more severe agency problems.

Kusnadi (2011) further suggest that a single leadership structure is more likely to hold large

cash reserves in Singapore and Malaysia. Thus, we hypothesize that separating the CEO and

chairman of the board positions will result in lower cash holdings:

H2c. Single leadership structure is associated with higher cash holdings.

3.3 Information transparency

Information transparency and disclosure are known to be integral to corporate

governance. A higher level of transparency and disclosure can reduce the information

asymmetry between a firm’s management and shareholders and thus mitigate agency

15

problems in corporate governance (Patel et al., 2002; Bailey et al., 2006). Patel et al. (2002)

show that Asian emerging markets present greater transparency and disclosure after the

financial crisis. Moreover, according to the trade-off theory of cash holdings, higher

information transparency enables firms to more easily raise external funds for capital

investments, which implies that firms with higher information transparency do not need to

retain much cash (Kusnadi, 2004). Kusnadi (2004) finds that corporate transparency is

negatively associated with corporate cash holdings in Singapore. Thus, we hypothesize:

H3. A higher level of information transparency is related to lower corporate cash holdings.

4. Data and Methodology

4.1 Sample selection

The sample firms employed in this study include firms listed on the Taiwan Stock

Exchange (TSE) and in the Over-The-Counter market (OTC) for the period 1990 to 2011.

Data are obtained from the Taiwan Economic Journal (TEJ) database. We require firms that

have no missing values for cash and cash equivalents, and remove firms whose net assets

equal zero in order to obtain adequate cash ratios. We exclude financial firms because they

may carry cash to meet capital requirements rather than for the economic reasons studied here.

The final sample consists of 22,587 firm-year observations over the sample period. Appendix

A gives a detailed description of each variable.

4.2 Variable descriptions

4.2.1 Cash holding

We employ several alternative definitions of cash holding, including (1) cash to total

assets, (2) cash to net assets (where net assets equals total assets minus cash) (3) current

assets to total assets, (4) current assets to net assets. We define the first two ratios as the cash

ratio, and the others as the current assets ratio. In this study, we compare different definitions

of cash holdings to check the secular trend of the typical firms during the sample period. All

the ratios of cash holdings are winsorized at the 1% level on either tail to minimize the

influence of outliers on the results.

4.2.2 Governance variables

We employ multiple measures of corporate governance as discussed in section 3, which

include ownership structure, board structure, and information transparency.

The specific variables for ownership structure are the divergence between control rights

16

and cash flow rights, group affiliation, and family control. This study defines control rights

following La Porta et al. (1999), adding the direct and indirect voting rights of controlling

shareholders in a firm’s control chain. The direct voting right is represented by the shares

directly held by the ultimate controlling shareholders, while the indirect voting right is

represented by the shares held by the ultimate controlling shareholder through a pyramid

structure or cross-holdings. The cash flow right is defined as the ownership of the ultimate

controlling shareholder. The divergence between control rights and cash flow rights equals

control rights minus cash flow rights, which captures the degree of agency problems. The

criteria to identify a firm’s membership in a business group in the TEJ include: (1) the

primary shareholders are the same as those in another affiliated firm or belong to the same

family (the primary shareholders refer to the largest shareholder, or those who own at least

5% of the firm’s shares), (2) one-third of the firm’s board of directors are identical to those of

other affiliated firms, (3) the CEO or the general manager is the same as that of another,

affiliated firm, (4) the firm is controlled by or is subordinated to an affiliated firm. We set a

dummy that equals one if the firm is group-affiliated, and zero, otherwise. The fundamental

criterion that TEJ uses to define a family-controlled firm is at least two family members

serving as directors, supervisors, or managers. TEJ has four requirements for identifying

whether firms are controlled by single family: (1) the chairman of the board and the general

manager are from the same family; (2) the number of seats controlled by internal directors

exceeds 50% while outside director seats are less than 33%; (3) the number of seats

controlled by directors is greater than 33% and at least three family ultimate controlling

members serve as directors, supervisors, and general manager; and (4) controlling

shareholdings are greater than necessary controlling shareholdings. The family control

dummy equals one if a firm is controlled by a family, and zero, otherwise. Due to the

limitations of the TEJ database, group affiliation data and family control data begins from

1999, and the divergence between control rights and cash flow rights starts in 1996.

This study uses board independence, board size, and chair duality as measures of the

firm’s board structure. The directors on each board are classified as either inside directors or

independent outside directors. Directors who are not related to any of the firm’s top managers

are classified as independent. Board independence is defined as the ratio of independent

directors to total directors. Board size is the number of directors on each firm’s board. Chair

duality is defined to mark firms in which the chairman of the board and the general manager

are the same person. A value of one labels a single leadership structure.

In 2003, the Securities and Futures Institute (SFI), entrusted by the TSEC and the GTSM,

17

launched the “Information Transparency and Disclosure Rankings System” (ITDRS) to

evaluate the degree of corporate transparency and information disclosure of all

TSEC/GTSM-listed companies in Taiwan. The ITDRS evaluates the degree of corporate

transparency by identifying 88 attributes grouped into five categories: (1) compliance with

mandatory disclosures (11 attributes); (2) timeliness of reporting (16 attributes); (3) quality of

information disclosed in annual reports (4 attributes); (4) quality of financial forecasts (46

attributes); and (5) quality of information disclosed on corporate websites (11 attributes). This

study employs a ranking system to measure the degree of information transparency for each

firm. The IDTRS evaluation system ranks the listed companies according to five grades, A+,

A, B, C, and C-, since the third evaluation year 2005. This paper uses values from 5 (A+) to 1

(C-) to represent this ranking. In 2003 and 2004, the ITDRS ranked all the listed and OTC

companies, and reported the top one-third firms that have the highest information

transparency. Thus, we define the top one-third firms as taking a value of four, while the

others take a value of two. In 2011, the IDTRS evaluation system was changed to seven

grades, A++, A+, A, A-, B, C, and C-. In order to maintain consistency, a firm is given a 5 if

its grade is A++ or A+, 4 if its grade is A or A-, and 3, 2, or 1 for B, C, and C-, respectively.

Due to the limitations of the ranking system, the information transparency data begins from

2003.

4.2.3 Financial variables

Given that cash holdings are firm specific, we use financial variables to control for

firm-specific effects. The financial variables in this study follow those of Opler, Pinkowitz,

Stulz, and Williamson (1999). The financial variables include firm size, leverage, market to

book ratio, cash flow ratio, net working capital to total assets, R&D to sales, capital

expenditure ratio, cash flow volatility, and dividend dummy.

Firm size is measured as the natural log of total assets. Leverage is measured as

long-term debt plus debt in current liabilities divided by total assets. The market to book ratio,

proxy for growth opportunities, is measured as (book value of assets minus book value of

equity plus the market value of equity) divided by book value of assets. We define cash flow

ratio as earnings after interest, dividends, and taxes, but before depreciation, divided by total

assets. Net working capital to total assets, a proxy for liquidity, is the ratio of current assets

net of cash minus current liabilities divided by total assets. R&D to sales is the ratio of

research and development expenditures to sales. The capital expenditure ratio is defined as

the ratio of capital expenditures to non-cash assets, where capital expenditures are the sum of

changes in fixed assets and depreciation. In order to control for the precautionary motive for

18

cash holdings, we add cash flow volatility to our regression models. We measure cash flow

volatility as the standard deviation of cash flow to total assets for the previous 5 years, and

we require at least three observations for each firm-year. We define a dividend dummy that

equals one if a company pays dividends in a given year and zero otherwise. All of the control

variables are winsorized at the 1% level on either tail to reduce the influence of outliers.

4.3 Research Design

We first start with univariate analysis in which we divide all the sample firms into

subsamples based on the corporate governance metrics in each year. The purpose of

univariate analysis is to examine whether there is a significant difference in cash holdings

between subsamples and test the hypotheses presented in section 3. The research design is as

follows (using the divergence between control and cash flow rights as example): (1) calculate

the median divergence between the control and cash flow rights in each year; (2) divide the

sample firms into two groups based on the median divergence between control and cash flow

rights; (3) calculate the average cash holdings in each subsample; and (4) perform a t-test to

examine the difference between the two groups. For the group affiliation, family control, and

chair duality metrics, we can directly separate our sample into two groups without calculating

the median. We use various definitions of cash holdings and provide the results in Table 4-10.

For the board independence metric, since there are no independent directors on the boards of

Taiwanese publicly traded firms before 2002, the univariate analysis of board independence

begins from 2002.

Furthermore, this study presents univariate comparisons of key descriptive variables by

cash to total assets quartile. We are interested in whether the characteristics of companies

which hold high cash balances, such as those companies in the fourth quartile, differ from

those with low cash balances, such as those in the first quartile. The quartiles are constructed

each year, and we calculate the means and medians of measures of corporate governance

according to the cash to total assets quartile. Then, we test the hypothesis that the fourth

quartile firms differ significantly from the first quartile firms using a t-test. The results are

presented in Table 11.We then examine the relation between corporate governance and cash

holdings and control for firm-specific variables in a multivariate setting using a time-series

model. The main dependent variables used in the regressions are cash to total assets and cash

to net assets. The independent variables are governance-related variables and firm-specific

factors affecting cash holdings. The variables of interest in this study are the corporate

governance proxies that discussed in section 3. We estimate the following baseline model:

19

)1(uYeardIndustryc

FINANCIALδNCYγTRANSPAREBOARDβOWNERSHIPαaholdingsCash

ti,ttti,j

ti,nti,bti,a0ti,

Where i denotes firm i; t denotes year t. OWNERSHIP denotes the three ownership variables:

the divergence between control and cash flow rights, group affiliation dummy, and family

control dummy. BOARD denotes three board attributes: board independence, board size, and

chair duality dummy. TRANSPARENCY denotes the degree of information transparency for

each firm. FINANCIAL denotes the financial variables used as control variables in the cash

holdings regressions. Both industry and year dummies control for industry and year fixed

effects. The standard errors of the coefficients have been adjusted in all the regression

specifications to control for serial correlation and heteroskedasticity. Variables definitions are

provided in the Appendix A.

5. Empirical results

5.1 Univariate Analysis

Table 1 presents summary statistics for governance variables and control variables. The

average divergence between control and cash flow rights is 6.37%, and the median is 1.50%.

For the publicly companies in Taiwan, the proportion of group-affiliated and

family-controlled firms are 58.28% and 34.54%, respectively. For the board structure

characteristics of firms in Taiwan, firms have about 7 directors with about 9.95%

independents directors on the board. In addition, 32.33% of our samples have single

leadership structure. The average information transparency grade is 2.93 and the median is 3.

Panel B of Table 1 reports the summary statistics for the financial variables. The average firm

has a natural log of total assets of 14.74, with an average leverage of 40.68%, an average

M/B ratio of 59.76%, an average cash flow of 7.32%, and an average net working capital of

9.62%. The average R&D to sales is about 3.12%, and the average firm spends 6.55% of total

assets on capital expenditures each year. For the publicly listed firms in Taiwan, the average

firms have an cash flow volatility of 5.12%. Finally, 48.63% of the firms in the sample

distribute dividends to their shareholders in any given year.

[Insert Table 1 around here]

Table 2 presents the correlation coefficients evaluating the relationship between cash

holdings and corporate governance variables. Cash holdings used in this table is cash to total

assets, which is the most traditional measure in the previous literature. Cash holding is

positively correlated with the divergence between control and cash flow rights, board

20

independence, chair duality, and information transparency, and the results are statistically

significant at the 1% level. On the other hand, cash holding is negatively correlated with

group affiliation, family control, and board size, and again the relationship is statistically

significant at the 1% level.

Furthermore, we evaluate the relationship between cash holdings and financial variables.

Cash holding is positively associated with cash flow ratio, R&D to sales, capital expenditure

ratio, cash flow volatility and dividend dummy. It is negatively correlated with firm size,

leverage, M/B ratio, and NWC to total assets. All of the correlations are significant, although

the correlation between cash holdings and NWC to total assets is marginally significant at the

10% level. Most of the correlations among the variables are quite high (and most are

significant), which raises concerns about endogeneity among these variables.


Following Bates et al. (2009), Table 3 reports the average and median cash holdings

over the sample period. The average cash to total assets is 8.65% in 1990 and increases to

19.23% by 2011, which more than doubles during the sample period. The same trend is

conveyed by the median cash to total assets ratio, which is presented in column 3. The

median cash to total assets is 4.82% in 1990 and increases to 15.43% by 2011, reaching a

peak of 15.67% in 2010. The next column is average cash to net assets. This ratio increases

from 11.39% in 1990 to 29.64% in 2011, with the median increases from 5.01% to 18.24%

over the sample period. The next four columns reproduce the average and median current

assets ratio for the sample firms in each year. The results show that there is a secular

increase in current assets ratio, although the extent of the increase is about 1.5 times from

1990 to 2011.


The evidence summarized in Table 3 illustrates a secular increase in the average and

median cash holdings. Table 4 tests the hypothesis that firms with high cash balances, such as

those in the fourth quartile, significantly differ from those with low cash balances, such as

those in the first quartile using a t-test. However, it turns out that firm characteristics do not

always change monotonically with cash holdings, meaning that comparing the firms in the

21

first and fourth quartiles of cash holdings is not sufficient to describe the relationship between

cash holdings and firm characteristics.

Firms in the fourth quartile of cash holdings differ significantly from firms in the first

quartile of cash holdings at the 1% level, except for the divergence between control and

cash flow rights. There is no significant difference between fourth and first quartiles for the

divergence between control and cash flow rights. As expected, firms with the largest cash

holdings are less likely to be group-affiliated than ones with the least cash. However, the

univariate relation between cash holding and group affiliation is not monotonic. Moreover,

firms with the highest cash ratio are less likely to be controlled by families. Board

independence increases monotonically with cash holdings, and the same result holds for

chair duality and the degree of information transparency. The board size is lower for firms

in the fourth quartile of cash holdings than for firms in the first quartile.


To assess whether the increase in cash holdings is related to the divergence between

control and cash flow rights, we divide the sample firms into two groups each year according

to the difference between control and cash flow rights. Table 5 shows that the average cash

ratio increases across each subsample whether we use any definitions of cash holdings. Firms

with high divergence between control and cash flow rights significantly hoard more cash

reserves, which is consistent with our hypothesis. Moreover, we present the whole sample

comparisons over the sample period, and the results are also significant. Given this evidence,

we conclude that there is a positive relationship between cash holdings and the divergence

between ownership and control rights.


In Table 6, we compare average cash holdings for firms that, respectively, group

affiliated and unaffiliated. The average cash to total assets of group-affiliated firms increase

from 9.55% in 1999 to 17.97 % in 2011, and unaffiliated firms increase from 11.09% to

20.81% over the sample period. When we perform a t-test to compare the cash holdings

within two groups, the results show that group-affiliated firms tend to hold less cash than

unaffiliated firms. This implies that group-affiliated firms enjoy greater use of internal

22

financial markets than unaffiliated firms. We next turn to the role of family control.


In Table 7, we reproduce the time series of the average cash holding for

family-controlled firms and nonfamily-controlled firms. The average cash to total assets for

family-controlled firms increase from 7.85% in 1999 to 15.58% in 2011, approximately

doubling during the sample period. For nonfamily-controlled firms, there also exists a secular

increase in cash to total assets ratio. In addition, the results of the t-tests show that firms

controlled by families hold significantly less cash reserves than nonfamily-controlled firms. It

implies that family-controlled firms have greater incentive to monitor management and thus

reduce the agency cost of cash holdings.


We next turn to examine the relationship between cash holdings and board structure.

Table 8 shows that firms with more independent directors in the boards tend to have higher

cash holdings. The results are robust when we use different definitions of cash holdings.

Moreover, the average cash to total assets for high board independence firms increase from

12.76% in 2002 to 22.96% in 2011. For low board independence companies, the cash to total

assets ratio increase from 8.40% to 15.68% over the sample period. The t-test of the mean

difference between the two groups is highly significant in each year.


To assess whether the increase in cash holdings is related to the board size, we divide the

sample firms into two groups each year. Table 9 shows that the average cash ratio increases

across each subsample regardless of which definition of cash holdings we use. For example,

the cash to total assets increases from 7.20% to 19.70% for firms with a large board size, and

11.48% to 18.43% for firms with a small board size over the sample period. When we

compare the mean difference in cash ratio between the two groups by t-test, the results show

that firms with fewer directors on the board are associated with higher cash holdings,

although the results are not significant. However, when we use the current asset ratio, the

23

results are significant at the 10% level. Given this evidence, we conclude that the relationship

between board size and cash holdings is negative for the samples in Taiwan.


In Table 10, we report average cash holdings for firms with single leadership (the

chairman of the board and general manager are the same person) and dual leadership. The

average cash holdings increase across each subsample regardless of which definition of cash

holdings we use. For instance, the cash to total assets increases from 7.78% to 19.83% for

firms with a single leadership structure, and 8.95% to 18.88% for firms with a dual leadership

structure, again doubling during the sample period. When we perform a t-test to compare the

cash holdings between the two groups, the results show that firms with a single leadership

structure tend to hoard more cash reserves than those with a dual leadership structure for

whole sample comparisons. This indicates that a dual leadership structure is more effective in

monitoring top management and reducing agency problems than a single leadership structure.


In this part, we examine the relationship between cash holdings and information

transparency. Table 11 provides results that the average cash holdings increase in each

subsample regardless of which definition of cash holding is used. For instance, cash to total

assets increases from 9.72% in 2003 to 18.25% in 2011 for firms with high information

transparency. The same trend occurs in firms with low information transparency. However,

when we compare cash holdings between two groups, there is no significant difference

between firms with high information transparency and low information transparency for each

year comparison. For the whole sample comparisons, firms with high information

transparency are associated with higher cash holdings, and the results are significant at the

1% level.


5.2 Multivariate Analysis

The regression results are reported in Table 12. Panel A of Table 12 employs cash to

24

total assets as the dependent variable, while Panel B uses cash to net assets as the dependent

variable. Financial variables are included in all of the specifications. Eq. (1) is estimated first

by including the OWNERSHIP variables (divergence between control and cash flow rights,

group affiliation, and family control). In model 1, the coefficient on divergence between

control and cash flow rights is negative, but not statistically significant. The coefficients on

group affiliation and family control are negative, but the coefficient of group affiliation is

statistically significant at the five percent level, indicating that firms are group-affiliated and

controlled by families are more inclined to hold small cash balances.

Model 2 of Panel A provides evidence on the effects of board structure. Specifically,

cash holdings are found to be positively associated with board independence and negatively

associated with board size. The coefficient on the chair duality is negative, but not

statistically significant. Model 3 demonstrates that the coefficient on information

transparency displays a positive association with cash holdings, which is not consistent with

our hypothesis. Combining the corporate governance variables yield the results presented in

model 4 of Panel A. The previous findings on the ownership and board variables continue to

hold in the expected manner in that the coefficient on board independence is again positively

related to cash holdings; while those on group affiliation, family control and board size are

negatively related. The coefficients on the divergence between control and cash flow rights

and chair duality remain insignificant. In addition, the coefficients on information

transparency remain positive and significant. The signs and significance of the coefficients

for the financial variables are similar in Model 1 through Model 4. Large firms, firms with

high leverage and net working capital, and firms with heavier capital expenditures would be

expected to hold proportionately smaller amounts of cash. Conversely, firms with better

investment opportunities (as measured by M/B ratio), higher cash flow ratio and R&D to

sales, and firms with higher cash flow volatility and paying out dividends are expected to

hold proportionately larger amounts of cash because the opportunity cost of a cash shortfall

could potentially be very large for such firms. The signs on all, except for cash flow ratio and

dividend dummy are consistent with Bates et al. (2009), and most are significant at the one

percent level. The coefficient on the capital expenditure ratio term is negative, but not

statistically significant.

Furthermore, we consider specifications with fixed effects. First, we estimate Model 5

with industry fixed effects. With industry fixed effects, the coefficient on divergence between

control and cash flow rights becomes positive, the direction is consistent with our prediction,

although it is not significant. However, the coefficient of group affiliation becomes positive

25

and insignificant, while other corporate governance variables hold the same results as in

Model 4. Second, we examine a regression specification using year fixed effects. In this

specification, group affiliation has a negative and significant coefficient. We still report the R2

for fixed effects model, and it turns out that year fixed effects explains better variation in cash

holdings than industry fixed effects. In addition, the signs and significance of the coefficients

for the financial variables are similar to those found in model 4.

Model 7 re-estimates Model 4 using changes in the variables rather than levels. This

approach eliminates the impact of constant unobservable firm characteristics on cash

holdings. In this specification, we include the lagged change in cash and the lagged level of

cash to allow for partial adjustment of the cash ratio to the equilibrium level. The coefficients

on the corporate governance variables and financial variables yield the same results as in

Model 4.

Panel B of Table 12 re-estimates Panel A using cash to net assets as the dependent

variable. The coefficient of the divergence between control and cash flow rights becomes

positive, which is consistent with our prediction, although it is not significant. The signs and

coefficients of other corporate governance variables remain the same as those found in Panel

A, indicating that our results are quite robust whether we use either definition of cash

holdings. Further, the financial variables in the regressions have the same signs and

significances as in Panel A.


6. Conclusions and Discussion

In this study, we examine how corporate governance metrics affect corporate cash

holdings. We first find that there is a secular increase from 1990 to 2011 in the average cash

ratio for Taiwanese publicly traded firms. The average cash to total assets is more than

doubles over the sample period. In univariate comparisons, the ownership characteristics of

higher cash holding firms are less likely to be group-affiliated, and not controlled by families.

For the board structure of high cash balances firms, the board size is smaller and more

independent directors are involved in the boards. In addition, these firms tend to have a

higher degree of information transparency compared to firms with low cash balances. Further,

we find that firms with a high divergence between control and cash flow rights are more

26

likely to accumulate cash when we divide the whole sample into two groups. However, we

find no evidence that firms with a single leadership structure are associated with higher cash

holding.

According to the regression results, the relationship between corporate governance

metrics and cash holding is the same as we find in the univariate analysis, although the

coefficient of the divergence between control and cash flow rights is not significant. We again

find that there is no systematic relationship between leadership structure and cash holdings.

The results hold after we use industry and year fixed effects. Combining the univariate and

regressions results, we infer that group affiliation is associated with better internal financial

markets; further, family-controlled firms have more incentives to monitor the management

and thus mitigate agency costs of cash holdings. Based on the board structure, the results

imply that larger board size provides better monitoring services when managers’

opportunities to expropriate private benefits are high, which in turn reduces the agency

problems. Our evidence suggests that corporate governance structures are important in

determining cash holdings for Taiwanese publicly-traded firms.

In this study, the results of board independence and information transparency are not

consistent with our hypothesis, which may be due to certain variables that we have not

considered in the research design. One possible reason is that those firms outweigh the

benefits of holding higher cash than the costs of holding cash. As we discussed in previous

section, several factors such as precautionary motive or transaction motive, contribute to the

needs for firms’ cash holdings. When firms with more independent directors on the board or

higher level of information transparency, the marginal cost of holding higher level of cash is

lower than the ones with low level of board independence or information transparency. In this

case, the higher level of cash holding could be mainly determined by the other motives with

less consideration of agency cost. Thus, it could lead to opposite signs in the empirical results.

Because we focus on the agency perspective of cash holdings, lack of detail analyses on other

motives of cash holdings results in less clear cause of this evidence. This is the limitation of

this study, and we leave it for future research.

27

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30

Appendix A. Definitions of variables Category / Item Definition A. Cash holdings Cash holdings (1) Cash to total assets, (2) cash to net assets (where net assets

equals to total assets minus cash) (3) current assets to total assets, (4) current assets to net assets.

B. Corporate governance variables Control rights The direct and indirect voting rights of controlling shareholders in a

firm’s control chain. Cash flow rights The ownership of the ultimate controlling shareholder. Divergence between control and cash flow rights

The difference between control and cash flow rights.

Group affiliation (1) The primary shareholders are the same as other affiliated firm or belong to the same family (the primary shareholders refer to the largest shareholder, or who own at least 5% of the firm’s shares), (2) one-third of a firm’s board of directors are identical to those of other affiliated firms, (3) the CEO or the general manager is the same as other affiliated firm, (4) the firm is controlled by or is subordinated to an affiliated firm. We set a dummy that equals to one if the firm is group-affiliated, and equals to zero, otherwise.

Family control (1) the chairman of the board and the general manager are served by single family members, (2) the seats controlled by directors are greater than 50% and outside directors seats are less than 33%, (3) the seats controlled by directors are greater than 33% and at least three family ultimate controlling members serve as directors, supervisors, and general manager, (4) controlling shareholdings are greater than necessary controlling shareholdings. The family control dummy equals to one if a firm is controlled by a family, and zero, otherwise.

Board independence The ratio of independent directors to total directors. Board size Number of the directors serving on the board. Chair duality Dummy variable=1, if the chairman of the board and the CEO are the

same person, 0 otherwise. Information transparency The Information Transparency and Disclosure Rankings System

(ITDRS) ranks the listed companies according to five grades, A+, A, B, C, and C-. This study sets the value from 5 to 1 which corresponds to the company’s ranking from grade A+ to C-.

C. Financial variables Firm size The natural log of total assets. Leverage (Long- term debt + debt in current liabilities) / book value of total

assets. Market to book ratio (M/B ratio) (Book value of total assets - book value of equity + market value of

equity) / book value of total assets. Cash flow ratio (Earnings after interest, dividends, and taxes, but before

depreciation) / total assets. Net working capital to total assets (NWC

/ total assets) (Current assets net of cash - current liabilities) / total assets.

R&D to sales Research and development expenditures to sales. Capital expenditure ratio Capital expenditures to total assets. Cash flow volatility The standard deviation of cash flow to total assets for the previous 5

years. Dividend dummy Dummy variable equals to one if a company pays dividend in a given

year, and zero otherwise.

31

Table 1 Descriptive statistics This table provides summary statistics for the sample. The data set comprises 22,587 firm-year observations covering the period from 1990 to 2011. Panel A presents the summary statistics for the corporate governance variables as described in Appendix A. For the dummy variables (Group affiliation, Family control, Chair duality, Dividend dummy), the mean represents the proportion of firm with a value of 1 for variables. Panel B provides the descriptive statistics for the financial variables as described in Appendix A.

Panel A: Corporate Governance Variables

Variable Mean Median Std Dev 1st Quartile 3rd Quartile N

Control rights 0.3177 0.2847 0.1939 0.1651 0.4408 16,009

Cash flow rights 0.2539 0.2119 0.1866 0.1072 0.3604 16,009

Control - ownership 0.0637 0.0150 0.1150 0.0002 0.0671 16,009

Group affiliation 0.5828 1 0.4931 0 1 16,742

Family control 0.3454 0 0.4755 0 1 16,742

Board independence 0.0995 0.0000 0.1539 0.0000 0.25 18,576

Board size 6.9340 7 2.8852 5 7 18,576

Chair duality 0.3233 0 0.4677 0 1 22,567

Information transparency 2.9340 3 0.8275 2 4 9,877

Panel B: Financial Variables

Variable Mean Median Std Dev 1st Quartile 3rd Quartile N

Firm size 14.7394 14.6136 1.4913 13.7158 15.6362 22,585

Leverage 0.4068 0.4090 0.1831 0.2713 0.5364 22,585

M/B ratio 0.5976 0.6260 0.1962 0.5085 0.7299 14,930

Cash flow ratio 0.0732 0.0741 0.0897 0.0335 0.1207 22,587

NWC / total assets 0.0962 0.0901 0.1682 -0.0103 0.2034 22,585

R&D to sales 0.0312 0.0078 0.0668 0.0000 0.0314 19,549

Capital expenditure ratio 0.0655 0.0383 0.0776 0.0129 0.0886 22,587

Cash flow volatility 0.0512 0.0367 0.0481 0.0215 0.0621 19,421

Dividend dummy 0.4863 0 0.4998 0 1 22,385

32

Table 2 Correlation analysis This table presents the correlation coefficients between cash holdings and corporate governance variables & financial variables. Superscripts a, b, and c indicate significance at the 1%, 5%, and 10% levels, respectively.

Cash

holdings Control-cash

flow Group

affiliationFamily control

Board independence

Board size

Chair duality

Information transparency

Firm size

LeverageM/B ratio

Cash flow ratio

NWC / total

assets

R&D to sales

Capital expenditure

ratio

Cash flow

volatility

Dividend dummy

Cash holdings 1

Control-cash flow 0.0172a 1

Group affiliation -0.0816a 0.2625a 1

Family control -0.1556a 0.1752a 0.5952a 1

Board independence 0.2872a 0.0123a -0.2165a -0.2481a 1

Board size -0.0496a 0.1694a 0.1533a 0.0772a -0.0909a 1

Chair duality 0.0334a -0.1373a -0.1176a -0.0964a 0.0716a -0.1461a 1

Information transparency 0.1536a 0.0851a 0.0509a 0.0040a 0.0898a 0.0799a -0.0452a 1

Firm size -0.1362a 0.1299a 0.3562a 0.2513a -0.2252a 0.2871a -0.2010a 0.2372a 1

Leverage -0.3606a -0.0057a 0.0493a 0.0544a -0.0263a -0.0891a -0.0274a -0.0475a 0.2322a 1

M/B ratio -0.0832a 0.0394a 0.0541a 0.0293a 0.0718a 0.0728a -0.1272a 0.1532a 0.5263a 0.4541a 1

Cash flow ratio 0.2293a 0.0461a -0.0369a -0.0666a 0.1405a 0.0741b -0.0749a 0.1272a 0.1551a -0.2624a 0.3462a 1

NWC / total assets -0.0058c -0.0329a -0.1155a -0.1043a 0.1154a -0.0990a 0.0812a -0.0072a -0.2607a -0.3657a -0.1228a 0.1615a 1

R&D to sales 0.3323a 0.0322a -0.0437a -0.1041a 0.1762a -0.0546a 0.1154a 0.0625a -0.2258a -0.3191a -0.3162a -0.0767a 0.1139a 1

Capital expenditure 0.0597a 0.0206a 0.0003a 0.0080a 0.0759a 0.0217a 0.0195a 0.0681a 0.1030a 0.0089a 0.0298a 0.0745a -0.1180a 0.0447a 1

Cash flow volatility 0.1520a 0.0485a 0.0287 -0.0084a 0.1202a -0.0979a 0.0882a -0.0771a -0.2209a -0.0643a -0.3043a -0.1084a 0.0218a 0.2736a 0.0372a 1

Dividend dummy 0.1579a 0.0430a -0.0189a -0.0462a 0.0855a 0.0891a -0.0812a 0.1437a 0.1876a -0.1448a 0.4026a 0.5823a 0.2104a -0.0861a 0.0008a -0.2587a 1

33

Table 3 Average and Median Cash Ratios from 1990 to 2011 The sample includes all TEJ firm-year observations from 1990 to 2011 with no missing values for the cash and cash equivalents. We exclude the samples that net assets equal to zero in order to get the correct cash ratios. Financial firms are excluded from the sample, yielding a panel of 22,605 observations. The variables are winsorized at the 1% level on either tail to avoid outliers.

Year

Cash /

Total Assets

Cash /

Net Assets

Current Assets /

Total Assets

Current Assets /

Net Assets

Mean Median Mean Median Mean Median Mean Median

1990 0.087 0.048 0.114 0.050 0.471 0.460 0.536 0.496

1991 0.092 0.057 0.125 0.061 0.474 0.461 0.545 0.499

1992 0.086 0.047 0.112 0.049 0.467 0.449 0.530 0.494

1993 0.082 0.047 0.103 0.049 0.486 0.467 0.545 0.518

1994 0.096 0.057 0.133 0.060 0.518 0.502 0.603 0.545

1995 0.089 0.048 0.123 0.051 0.528 0.508 0.606 0.563

1996 0.100 0.058 0.141 0.062 0.537 0.533 0.629 0.580

1997 0.120 0.071 0.180 0.077 0.555 0.555 0.679 0.616

1998 0.115 0.064 0.170 0.069 0.541 0.538 0.657 0.594

1999 0.102 0.063 0.142 0.068 0.536 0.534 0.630 0.584

2000 0.109 0.070 0.153 0.075 0.536 0.538 0.638 0.590

2001 0.099 0.062 0.134 0.066 0.522 0.524 0.609 0.569

2002 0.097 0.066 0.129 0.070 0.536 0.545 0.622 0.592

2003 0.101 0.072 0.133 0.077 0.559 0.566 0.647 0.622

2004 0.115 0.084 0.152 0.091 0.568 0.580 0.669 0.650

2005 0.131 0.101 0.178 0.112 0.587 0.598 0.708 0.684

2006 0.135 0.103 0.187 0.115 0.594 0.604 0.722 0.690

2007 0.150 0.114 0.218 0.129 0.602 0.611 0.754 0.706

2008 0.165 0.126 0.244 0.144 0.577 0.581 0.744 0.688

2009 0.185 0.149 0.283 0.175 0.592 0.599 0.789 0.722

2010 0.192 0.157 0.295 0.186 0.605 0.615 0.812 0.744

2011 0.192 0.154 0.296 0.182 0.603 0.615 0.809 0.748

34

Table 4 Firm characteristics by cash/assets quartiles Univariate comparison of means and medians of measures of corporate governance characteristics of Taiwan publicly traded firms. Median values are in the brackets. Quartiles for cash-to-assets are determined each year. The t-statistic is for a difference of means test from the first to the fourth quartile. Variable definitions are provided in the Appendix A.

Variables Q1 Q2 Q3 Q4 Difference(Q4-Q1)

t-statistic p-value

Cash / Total Assets 0.0418 0.0971 0.1695 0.3298 0.2880 90.3574 (0.0000)

[0.0358] [0.0916] [0.1566] [0.3027]

Control Rights 0.3399 0.2993 0.2739 0.2782 -0.0617 -11.9285 (0.0000)

[0.3226] [0.2766] [0.2439] [0.2415]

Cash Flow Rights 0.2785 0.2473 0.2196 0.2170 -0.0615 -12.1224 (0.0000)

[0.2487] [0.2097] [0.1812] [0.1683]

Control Ownership 0.0614 0.0521 0.0543 0.0611 -0.0002 -0.0721 (0.9425)

[0.0109] [0.0147] [0.0167] [0.0212]

Group Affiliation 0.6927 0.6179 0.6189 0.5557 -0.1369 -9.6953 (0.0000)

[1.0000] [1.0000] [1.0000] [1.0000]

Family Control 0.5073 0.3875 0.3151 0.2605 -0.2467 -18.1200 (0.0000)

[1.0000] [0.0000] [0.0000] [0.0000]

Board Independence 0.1607 0.1888 0.2164 0.3052 0.1445 36.9484 (0.0000)

[0.1455] [0.1812] [0.2128] [0.2760]

Board Size 7.0886 6.7667 6.7144 6.6586 -0.4300 -6.4218 (0.0000)

[7.0000] [7.0000] [7.0000] [7.0000]

Chair Duality 0.3166 0.3260 0.3408 0.3680 0.0514 3.6960 (0.0002)

[0.0000] [0.0000] [0.0000] [0.0000]

Information Transparency

3.0503 3.1406 3.1752 3.1928 0.1424 6.8752 (0.0000)

[3.0000] [3.0000] [3.0000] [3.0000]

35

Table 5. Average Cash Ratios Sorted by Divergence between Ownership and Control Rights The sample includes all TEJ firm-year observations from 1996 to 2011 with no missing values for cash and cash equivalents and is sorted by divergence between ownership and control rights. Since the data for divergence between ownership and control rights is not available before 1996, the results are reported from 1996. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

High

Divergence Low

DivergenceDifference t-statistic (p-value)

High Divergence

Low Divergence

Difference t-statistic (p-value)

Panel A: Cash Ratio

Year 1. Cash / Total Assets 2. Cash / Net Assets

1996 0.0911 0.0717 0.0194 2.8936 (0.0039) 0.1246 0.0876 0.0370 3.0130 (0.0027)

1997 0.1137 0.0908 0.0228 3.1421 (0.0017) 0.1642 0.1184 0.0458 3.1739 (0.0016)

1998 0.1080 0.0751 0.0328 5.1234 (0.0000) 0.1547 0.0925 0.0622 5.1028 (0.0000)

1999 0.0993 0.0753 0.0240 4.1287 (0.0000) 0.1362 0.0969 0.0393 3.5964 (0.0003)

2000 0.1055 0.0872 0.0183 3.2651 (0.0011) 0.1420 0.1129 0.0290 2.8224 (0.0048)

2001 0.0988 0.0835 0.0153 2.9226 (0.0035) 0.1326 0.1053 0.0273 2.9236 (0.0035)

2002 0.0950 0.0857 0.0093 1.9102 (0.0563) 0.1239 0.1081 0.0158 1.8169 (0.0694)

2003 0.1028 0.0863 0.0165 3.3908 (0.0007) 0.1375 0.1070 0.0305 3.4051 (0.0007)

2004 0.1157 0.0978 0.0178 3.4748 (0.0005) 0.1560 0.1235 0.0326 3.3959 (0.0007)

2005 0.1294 0.1181 0.0113 2.0160 (0.0440) 0.1778 0.1538 0.0239 2.2275 (0.0261)

2006 0.1389 0.1203 0.0186 3.1131 (0.0019) 0.1956 0.1611 0.0345 2.8453 (0.0045)

2007 0.1563 0.1350 0.0213 3.1953 (0.0014) 0.2307 0.1904 0.0402 2.8402 (0.0046)

2008 0.1738 0.1512 0.0226 3.2159 (0.0013) 0.2612 0.2209 0.0404 2.6361 (0.0085)

2009 0.1916 0.1700 0.0215 2.9757 (0.0030) 0.2964 0.2518 0.0447 2.7671 (0.0057)

2010 0.1995 0.1768 0.0227 3.2144 (0.0013) 0.3094 0.2610 0.0484 3.0673 (0.0022)

2011 0.2001 0.1765 0.0236 3.0964 (0.0020) 0.3100 0.2641 0.0459 2.7158 (0.0067)

Whole sample 0.1365 0.1151 0.0214 12.9297 (0.0000) 0.1976 0.1572 0.0404 12.1113 (0.0000)

36

(Continued)

High

Divergence Low

DivergenceDifference t-statistic (p-value)

High Divergence

Low Divergence


Panel B: Current Asset Ratio

Year 1. Current Assets / Total Assets 2. Current Assets / Net Assets

1996 0.5335 0.4913 0.0422 2.7765 (0.0056) 0.6137 0.5404 0.0733 3.5873 (0.0004)

1997 0.5515 0.5070 0.0446 3.1934 (0.0015) 0.6625 0.5783 0.0842 3.9126 (0.0001)

1998 0.5313 0.4940 0.0373 2.8132 (0.0050) 0.6329 0.5465 0.0864 4.5517 (0.0000)

1999 0.5356 0.4974 0.0383 3.0718 (0.0022) 0.6244 0.5555 0.0689 3.9261 (0.0001)

2000 0.5394 0.5016 0.0378 3.1783 (0.0015) 0.6317 0.5710 0.0607 3.5771 (0.0004)

2001 0.5233 0.4941 0.0291 2.4763 (0.0134) 0.6092 0.5579 0.0513 3.1381 (0.0017)

2002 0.5423 0.5143 0.0280 2.4216 (0.0156) 0.6249 0.5822 0.0427 2.6746 (0.0076)

2003 0.5701 0.5313 0.0389 3.4746 (0.0005) 0.6646 0.5985 0.0661 4.2019 (0.0000)

2004 0.5746 0.5431 0.0315 2.8872 (0.0039) 0.6817 0.6200 0.0617 3.8812 (0.0001)

2005 0.5920 0.5590 0.0330 3.0036 (0.0027) 0.7160 0.6576 0.0584 3.4467 (0.0006)

2006 0.5970 0.5722 0.0249 2.2526 (0.0244) 0.7336 0.6773 0.0563 3.1610 (0.0016)

2007 0.6123 0.5839 0.0284 2.5914 (0.0097) 0.7776 0.7138 0.0638 3.2622 (0.0011)

2008 0.5844 0.5603 0.0241 2.2136 (0.0270) 0.7640 0.7071 0.0569 2.8131 (0.0050)

2009 0.5993 0.5734 0.0259 2.4130 (0.0159) 0.8093 0.7426 0.0668 3.1668 (0.0016)

2010 0.6159 0.5874 0.0285 2.7835 (0.0054) 0.8372 0.7635 0.0737 3.6158 (0.0003)

2011 0.6066 0.5899 0.0167 1.5329 (0.1255) 0.8246 0.7676 0.0570 2.6444 (0.0083)

Whole sample 0.5730 0.5409 0.0321 10.9616 (0.0000) 0.7095 0.6425 0.0670 13.9581 (0.0000)

37

Table 6. Average Cash Ratios Sorted by Group Affiliation The sample includes all TEJ firm-year observations from 1999 to 2011 with no missing values for cash and cash equivalents and is sorted by family control. Since the data for family control is not available before 1999, the results are reported from 1999. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

Group-

affiliated Unaffiliated Difference t-statistic (p-value)

Group- affiliated

Unaffiliated Difference t-statistic (p-value)

Panel A: Cash Ratio


1999 0.0955 0.1109 -0.0154 -2.1017 (0.0359) 0.1302 0.1591 -0.0290 -1.8907 (0.0590)

2000 0.1026 0.1186 -0.0161 -2.2415 (0.0252) 0.1432 0.1680 -0.0248 -1.6501 (0.0992)

2001 0.0918 0.1110 -0.0192 -2.9364 (0.0034) 0.1210 0.1533 -0.0323 -2.5251 (0.0117)

2002 0.0887 0.1098 -0.0211 -3.5126 (0.0005) 0.1164 0.1473 -0.0309 -2.6602 (0.0079)

2003 0.0937 0.1122 -0.0185 -3.1550 (0.0017) 0.1217 0.1490 -0.0273 -2.4484 (0.0145)

2004 0.1051 0.1289 -0.0239 -3.9158 (0.0001) 0.1383 0.1722 -0.0339 -2.9428 (0.0033)

2005 0.1213 0.1445 -0.0232 -3.5700 (0.0004) 0.1646 0.1985 -0.0340 -2.6432 (0.0083)

2006 0.1244 0.1502 -0.0258 -3.8555 (0.0001) 0.1699 0.2125 -0.0426 -3.0773 (0.0021)

2007 0.1403 0.1643 -0.0240 -3.3652 (0.0008) 0.2005 0.2416 -0.0411 -2.6347 (0.0085)

2008 0.1542 0.1781 -0.0239 -3.2504 (0.0012) 0.2249 0.2699 -0.0449 -2.7143 (0.0067)

2009 0.1722 0.2008 -0.0286 -3.7351 (0.0002) 0.2620 0.3091 -0.0471 -2.6631 (0.0078)

2010 0.1802 0.2074 -0.0272 -3.5648 (0.0004) 0.2732 0.3221 -0.0489 -2.7603 (0.0058)

2011 0.1797 0.2081 -0.0285 -3.6253 (0.0003) 0.2693 0.3309 -0.0616 -3.3704 (0.0008)

Whole sample 0.1287 0.1543 -0.0256 -12.5645 (0.0000) 0.1827 0.2263 -0.0436 -10.0068 (0.0000)

38

(Continued)

Group-

affiliated Unaffiliated Difference t-statistic (p-value)

Group- affiliated

Unaffiliated Difference t-statistic (p-value)



1999 0.5102 0.5780 -0.0678 -4.9718 (0.0000) 0.5924 0.6895 -0.0971 -4.5381 (0.0000)

2000 0.5090 0.5789 -0.0699 -5.4328 (0.0000) 0.6011 0.6961 -0.0950 -4.4244 (0.0000)

2001 0.4915 0.5682 -0.0767 -5.9956 (0.0000) 0.5668 0.6755 -0.1087 -5.4952 (0.0000)

2002 0.5062 0.5824 -0.0763 -6.1233 (0.0000) 0.5808 0.6842 -0.1034 -5.4254 (0.0000)

2003 0.5322 0.5992 -0.0670 -5.4848 (0.0000) 0.6107 0.7025 -0.0918 -5.0297 (0.0000)

2004 0.5390 0.6113 -0.0723 -6.3205 (0.0000) 0.6281 0.7295 -0.1014 -5.6906 (0.0000)

2005 0.5628 0.6239 -0.0611 -5.3660 (0.0000) 0.6711 0.7644 -0.0933 -4.9174 (0.0000)

2006 0.5703 0.6302 -0.0599 -5.3146 (0.0000) 0.6836 0.7806 -0.0969 -5.0048 (0.0000)

2007 0.5809 0.6318 -0.0509 -4.5963 (0.0000) 0.7186 0.8051 -0.0865 -4.1677 (0.0000)

2008 0.5518 0.6113 -0.0595 -5.5042 (0.0000) 0.7012 0.8005 -0.0994 -4.6791 (0.0000)

2009 0.5669 0.6249 -0.0580 -5.3998 (0.0000) 0.7461 0.8448 -0.0987 -4.3754 (0.0000)

2010 0.5834 0.6339 -0.0505 -4.8517 (0.0000) 0.7707 0.8651 -0.0943 -4.2239 (0.0000)

2011 0.5781 0.6359 -0.0578 -5.5469 (0.0000) 0.7590 0.8736 -0.1147 -5.1699 (0.0000)

Whole sample 0.5466 0.6110 -0.0644 -19.9732 (0.0000) 0.6679 0.7711 -0.1032 -17.6878 (0.0000)

39

Table 7. Average Cash Ratios Sorted by Family Control The sample includes all TEJ firm-year observations from 1999 to 2011 with no missing values for cash and cash equivalents and is sorted by family control. Since the data for family control is not available before 1999, the results are reported from 1999. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

Family-

controlled

Nonfamily-

controlledDifference t-statistic (p-value)

Family-

controlled

Nonfamily-


Panel A: Cash Ratio


1999 0.0785 0.1154 -0.0369 -5.7185 (0.0000) 0.0990 0.1672 -0.0682 -5.2899 (0.0000)

2000 0.0880 0.1212 -0.0332 -5.0328 (0.0000) 0.1151 0.1752 -0.0601 -4.3742 (0.0000)

2001 0.0735 0.1145 -0.0409 -7.0399 (0.0000) 0.0910 0.1587 -0.0676 -6.2468 (0.0000)

2002 0.0730 0.1110 -0.0380 -6.7556 (0.0000) 0.0922 0.1497 -0.0576 -5.3176 (0.0000)

2003 0.0824 0.1117 -0.0293 -5.2267 (0.0000) 0.1041 0.1487 -0.0447 -4.2444 (0.0000)

2004 0.0917 0.1272 -0.0355 -6.1820 (0.0000) 0.1151 0.1721 -0.0570 -5.4209 (0.0000)

2005 0.1089 0.1425 -0.0336 -5.4238 (0.0000) 0.1412 0.1985 -0.0573 -4.8097 (0.0000)

2006 0.1121 0.1472 -0.0351 -5.4405 (0.0000) 0.1509 0.2070 -0.0561 -4.2377 (0.0000)

2007 0.1228 0.1646 -0.0418 -6.0363 (0.0000) 0.1713 0.2419 -0.0706 -4.6508 (0.0000)

2008 0.1294 0.1816 -0.0521 -7.3348 (0.0000) 0.1808 0.2753 -0.0945 -6.0344 (0.0000)

2009 0.1491 0.2018 -0.0528 -6.7836 (0.0000) 0.2212 0.3121 -0.0909 -5.0697 (0.0000)

2010 0.1543 0.2107 -0.0564 -7.3469 (0.0000) 0.2265 0.3280 -0.1015 -5.7698 (0.0000)

2011 0.1558 0.2098 -0.0540 -6.9636 (0.0000) 0.2274 0.3298 -0.1024 -5.8411 (0.0000)

Whole sample 0.1103 0.1548 -0.0445 -22.9576 (0.0000) 0.1508 0.2275 -0.0767 -18.8598 (0.0000)

40

(Continued)

Family-

controlled

Nonfamily-


Family-

controlled

Nonfamily-




1999 0.4813 0.5698 -0.0885 -6.6510 (0.0000) 0.5373 0.6862 -0.1489 -7.6289 (0.0000)

2000 0.4768 0.5715 -0.0948 -7.2254 (0.0000) 0.5445 0.6936 -0.1491 -7.3219 (0.0000)

2001 0.4542 0.5613 -0.1071 -8.2214 (0.0000) 0.5048 0.6709 -0.1661 -9.0176 (0.0000)

2002 0.4688 0.5756 -0.1068 -8.3384 (0.0000) 0.5240 0.6784 -0.1543 -8.0736 (0.0000)

2003 0.4940 0.5957 -0.1016 -8.1470 (0.0000) 0.5574 0.6982 -0.1409 -7.6636 (0.0000)

2004 0.5074 0.6013 -0.0939 -7.9041 (0.0000) 0.5765 0.7195 -0.1430 -7.9275 (0.0000)

2005 0.5308 0.6182 -0.0873 -7.4357 (0.0000) 0.6166 0.7588 -0.1422 -7.8387 (0.0000)

2006 0.5395 0.6246 -0.0851 -7.3027 (0.0000) 0.6362 0.7702 -0.1340 -6.8080 (0.0000)

2007 0.5535 0.6276 -0.0741 -6.4187 (0.0000) 0.6661 0.8010 -0.1349 -6.4792 (0.0000)

2008 0.5222 0.6045 -0.0823 -7.1691 (0.0000) 0.6364 0.7965 -0.1602 -7.5511 (0.0000)

2009 0.5374 0.6186 -0.0812 -7.0980 (0.0000) 0.6833 0.8402 -0.1569 -6.6356 (0.0000)

2010 0.5577 0.6289 -0.0711 -6.4196 (0.0000) 0.7086 0.8627 -0.1540 -6.8050 (0.0000)

2011 0.5510 0.6288 -0.0778 -7.0146 (0.0000) 0.6982 0.8630 -0.1648 -7.4202 (0.0000)

Whole sample 0.5148 0.6044 -0.0896 -26.4472 (0.0000) 0.6097 0.7645 -0.1548 -27.0630 (0.0000)

41

Table 8. Average Cash Ratios Sorted by Board Independence The sample includes all TEJ firm-year observations from 2002 to 2011 with no missing values for cash and cash equivalents and is sorted by board independence. Since the data for board independence is not available before 2002, the results are reported from 2002. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

High Board

Independence Low Board

IndependenceDifference t-statistic (p-value)

High Board Independence

Low Board Independence


Panel A: Cash Ratio

Year 1. Cash / Total Assets 2. Cash / Net Assets 2002 0.1276 0.0840 0.0436 5.8386 (0.0000) 0.1718 0.1076 0.0642 4.5479 (0.0000) 2003 0.1268 0.0787 0.0481 8.0109 (0.0000) 0.1718 0.0967 0.0751 6.4946 (0.0000) 2004 0.1403 0.0839 0.0564 9.8125 (0.0000) 0.1896 0.1040 0.0856 7.8736 (0.0000) 2005 0.1586 0.0976 0.0609 10.0343 (0.0000) 0.2208 0.1235 0.0973 8.1359 (0.0000) 2006 0.1598 0.1038 0.0560 8.7887 (0.0000) 0.2263 0.1364 0.0898 6.7946 (0.0000) 2007 0.1775 0.1187 0.0588 8.3748 (0.0000) 0.2639 0.1625 0.1014 6.6272 (0.0000) 2008 0.1974 0.1273 0.0702 9.7048 (0.0000) 0.3030 0.1739 0.1291 8.0984 (0.0000) 2009 0.2176 0.1454 0.0722 9.5534 (0.0000) 0.3484 0.2026 0.1458 8.4144 (0.0000) 2010 0.2264 0.1547 0.0717 9.5432 (0.0000) 0.3612 0.2201 0.1411 8.0988 (0.0000) 2011 0.2296 0.1568 0.0729 9.5665 (0.0000) 0.3723 0.2235 0.1488 8.3908 (0.0000)

Whole sample 0.1827 0.1133 0.0695 30.8415 (0.0000) 0.2754 0.1521 0.1234 25.2774 (0.0000)


Year 1. Current Assets / Total Assets 2. Current Assets / Net Assets 2002 0.6265 0.4991 0.1274 8.5495 (0.0000) 0.7498 0.5657 0.1841 8.6007 (0.0000) 2003 0.6386 0.4983 0.1403 11.7155 (0.0000) 0.7616 0.5555 0.2061 11.7840 (0.0000) 2004 0.6257 0.5049 0.1207 10.4905 (0.0000) 0.7575 0.5665 0.1910 11.2626 (0.0000) 2005 0.6390 0.5229 0.1161 10.1243 (0.0000) 0.7962 0.5968 0.1994 11.0641 (0.0000) 2006 0.6459 0.5313 0.1146 10.0791 (0.0000) 0.8070 0.6159 0.1911 10.2180 (0.0000) 2007 0.6510 0.5478 0.1032 9.1706 (0.0000) 0.8420 0.6540 0.1879 9.1476 (0.0000) 2008 0.6201 0.5279 0.0922 8.2086 (0.0000) 0.8326 0.6364 0.1962 9.4336 (0.0000) 2009 0.6311 0.5432 0.0879 7.9187 (0.0000) 0.8832 0.6720 0.2112 9.5377 (0.0000) 2010 0.6473 0.5603 0.0870 8.1015 (0.0000) 0.9080 0.7053 0.2027 9.2133 (0.0000) 2011 0.6432 0.5655 0.0777 7.3427 (0.0000) 0.9110 0.7109 0.2001 9.1367 (0.0000)

Whole sample 0.6366 0.5282 0.1084 30.1873 (0.0000) 0.8334 0.6238 0.2096 32.3849 (0.0000)

42

Table 9. Average Cash Ratios Sorted by Board Size The sample includes all TEJ firm-year observations from 1990 to 2011 with no missing values for cash and cash equivalents and is sorted by board size. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

Large

Board Size Small

Board Size Difference t-statistic (p-value)

Large Board Size

Small Board Size


Panel A: Cash Ratio


1990 0.0720 0.1148 -0.0428 -1.7331 (0.0894) 0.0848 0.1471 -0.0623 -1.6631 (0.1048)

1991 0.0806 0.1093 -0.0287 -1.7895 (0.0758) 0.0998 0.1408 -0.0410 -1.7382 (0.0843)

1992 0.0722 0.1074 -0.0352 -2.5650 (0.0112) 0.0883 0.1347 -0.0464 -2.3450 (0.0202)

1993 0.0628 0.0994 -0.0366 -3.1686 (0.0018) 0.0725 0.1241 -0.0516 -3.2114 (0.0016)

1994 0.0875 0.0998 -0.0123 -0.9773 (0.3296) 0.1087 0.1246 -0.0160 -0.8443 (0.3995)

1995 0.0775 0.0766 0.0009 0.0865 (0.9312) 0.0944 0.0930 0.0014 0.1005 (0.9200)

1996 0.0860 0.0856 0.0004 0.0467 (0.9628) 0.1113 0.1139 -0.0026 -0.1740 (0.8619)

1997 0.0981 0.1092 -0.0111 -1.3066 (0.1918) 0.1334 0.1548 -0.0214 -1.2200 (0.2229)

1998 0.0928 0.0939 -0.0011 -0.1468 (0.8833) 0.1239 0.1231 0.0008 0.0562 (0.9552)

1999 0.0809 0.0989 -0.0180 -2.6446 (0.0083) 0.1039 0.1367 -0.0328 -2.4616 (0.0140)

2000 0.0858 0.1130 -0.0272 -4.1891 (0.0000) 0.1084 0.1555 -0.0471 -3.7639 (0.0002)

2001 0.0864 0.1052 -0.0188 -3.0059 (0.0027) 0.1110 0.1417 -0.0307 -2.6538 (0.0081)

2002 0.0930 0.0958 -0.0028 -0.4731 (0.6362) 0.1246 0.1213 0.0033 0.3035 (0.7616)

2003 0.0967 0.0986 -0.0019 -0.3378 (0.7355) 0.1248 0.1275 -0.0027 -0.2569 (0.7973)

2004 0.1122 0.1090 0.0031 0.5305 (0.5959) 0.1473 0.1417 0.0056 0.5071 (0.6122)

2005 0.1271 0.1290 -0.0019 -0.2886 (0.7730) 0.1667 0.1782 -0.0115 -0.9191 (0.3583)

2006 0.1333 0.1306 0.0027 0.4045 (0.6860) 0.1809 0.1828 -0.0019 -0.1404 (0.8883)

2007 0.1466 0.1500 -0.0034 -0.4688 (0.6393) 0.2052 0.2229 -0.0177 -1.1073 (0.2684)

2008 0.1665 0.1570 0.0095 1.2489 (0.2119) 0.2407 0.2361 0.0046 0.2763 (0.7824)

2009 0.1859 0.1756 0.0103 1.3065 (0.1916) 0.2799 0.2699 0.0101 0.5576 (0.5772)

2010 0.1900 0.1913 -0.0012 -0.1534 (0.8781) 0.2832 0.3017 -0.0184 -0.9759 (0.3293)

2011 0.1970 0.1843 0.0128 1.5904 (0.1120) 0.3029 0.2842 0.0187 1.0095 (0.3129)

Whole sample 0.1298 0.1274 0.0024 1.3034 (0.1924) 0.1817 0.1813 0.0004 0.1047 (0.9166)

43

(Continued)

Large

Board Size Small

Board Size Difference t-statistic (p-value)

Large Board Size

Small Board Size




1990 0.4370 0.4471 -0.0102 -0.2283 (0.8203) 0.4778 0.5269 -0.0491 -0.7934 (0.4314)

1991 0.4050 0.4311 -0.0261 -0.9317 (0.3530) 0.4509 0.5010 -0.0501 -1.3839 (0.1685)

1992 0.3934 0.4335 -0.0401 -1.5162 (0.1314) 0.4334 0.5020 -0.0686 -2.0321 (0.0437)

1993 0.3866 0.4419 -0.0553 -2.1711 (0.0312) 0.4171 0.5034 -0.0863 -2.8284 (0.0052)

1994 0.4217 0.4615 -0.0398 -1.6617 (0.0981) 0.4716 0.5243 -0.0527 -1.7654 (0.0790)

1995 0.4144 0.4811 -0.0667 -2.9867 (0.0031) 0.4587 0.5294 -0.0707 -2.6699 (0.0080)

1996 0.4777 0.5428 -0.0652 -3.8535 (0.0001) 0.5405 0.6156 -0.0751 -3.1962 (0.0015)

1997 0.4836 0.5586 -0.0749 -4.7486 (0.0000) 0.5641 0.6627 -0.0986 -3.8846 (0.0001)

1998 0.4678 0.5465 -0.0787 -5.3241 (0.0000) 0.5413 0.6252 -0.0839 -3.8944 (0.0001)

1999 0.4745 0.5584 -0.0838 -5.9899 (0.0000) 0.5345 0.6508 -0.1164 -5.6852 (0.0000)

2000 0.4782 0.5686 -0.0903 -6.8155 (0.0000) 0.5417 0.6733 -0.1316 -6.7536 (0.0000)

2001 0.4715 0.5596 -0.0881 -6.7237 (0.0000) 0.5386 0.6544 -0.1158 -6.0746 (0.0000)

2002 0.4987 0.5584 -0.0597 -4.5957 (0.0000) 0.5791 0.6382 -0.0591 -3.1559 (0.0016)

2003 0.5362 0.5729 -0.0367 -2.9164 (0.0036) 0.6164 0.6590 -0.0426 -2.3624 (0.0183)

2004 0.5428 0.5866 -0.0438 -3.6347 (0.0003) 0.6370 0.6826 -0.0456 -2.5539 (0.0108)

2005 0.5630 0.6019 -0.0390 -3.2601 (0.0011) 0.6713 0.7258 -0.0545 -2.8819 (0.0040)

2006 0.5684 0.6147 -0.0463 -3.9241 (0.0001) 0.6866 0.7438 -0.0572 -2.9297 (0.0035)

2007 0.5803 0.6230 -0.0427 -3.6703 (0.0003) 0.7186 0.7843 -0.0657 -3.0880 (0.0021)

2008 0.5604 0.5931 -0.0328 -2.7828 (0.0055) 0.7182 0.7580 -0.0399 -1.8305 (0.0674)

2009 0.5796 0.5979 -0.0183 -1.5887 (0.1124) 0.7705 0.7880 -0.0175 -0.7523 (0.4520)

2010 0.5904 0.6238 -0.0334 -2.9243 (0.0035) 0.7825 0.8428 -0.0603 -2.5265 (0.0117)

2011 0.5939 0.6182 -0.0243 -2.1900 (0.0287) 0.8015 0.8187 -0.0172 -0.7464 (0.4555)

Whole sample 0.5321 0.5784 -0.0463 -14.9042 (0.0000) 0.6497 0.7030 -0.0533 -10.1533 (0.0000)

44

Table 10. Average Cash Ratios Sorted by Chair Duality The sample includes all TEJ firm-year observations from 1990 to 2011 with no missing values for cash and cash equivalents and is sorted by chair duality. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to different criteria of ownership structure. Cash ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A. Panel A: Cash Ratio

1. Cash / Total Assets 2. Cash / Net Assets

Year Single

Leadership Dual

LeadershipDifference t-statistic (p-value)

Single Leadership

Dual Leadership

Difference t- statistic (p-value)

1990 0.0778 0.0895 -0.0117 -0.9928 (0.3214) 0.0975 0.1195 -0.0221 -1.0394 (0.2993)

1991 0.0905 0.0925 -0.0021 -0.1731 (0.8627) 0.1170 0.1278 -0.0108 -0.4618 (0.6445)

1992 0.0817 0.0874 -0.0058 -0.5591 (0.5764) 0.1061 0.1140 -0.0080 -0.4281 (0.6688)

1993 0.0858 0.0807 0.0050 0.5789 (0.5629) 0.1084 0.1011 0.0073 0.5243 (0.6003)

1994 0.0913 0.0972 -0.0059 -0.5965 (0.5511) 0.1221 0.1380 -0.0159 -0.7594 (0.4479)

1995 0.0902 0.0887 0.0015 0.1660 (0.8682) 0.1180 0.1242 -0.0062 -0.3475 (0.7283)

1996 0.1048 0.0967 0.0081 0.9480 (0.3434) 0.1474 0.1351 0.0124 0.6941 (0.4878)

1997 0.1330 0.1133 0.0197 1.9867 (0.0475) 0.2126 0.1641 0.0485 2.0962 (0.0366)

1998 0.1199 0.1124 0.0074 0.8660 (0.3867) 0.1767 0.1658 0.0109 0.5835 (0.5597)

1999 0.1095 0.0972 0.0123 1.6807 (0.0931) 0.1528 0.1354 0.0174 1.1538 (0.2489)

2000 0.1198 0.1033 0.0165 2.2561 (0.0243) 0.1660 0.1461 0.0199 1.2830 (0.1998)

2001 0.1045 0.0969 0.0076 1.1494 (0.2506) 0.1392 0.1311 0.0081 0.6348 (0.5257)

2002 0.1045 0.0935 0.0110 1.7549 (0.0795) 0.1401 0.1230 0.0170 1.4077 (0.1595)

2003 0.1038 0.0997 0.0041 0.6728 (0.5012) 0.1387 0.1295 0.0092 0.7935 (0.4277)

2004 0.1183 0.1129 0.0054 0.8568 (0.3917) 0.1555 0.1501 0.0054 0.4524 (0.6510)

2005 0.1318 0.1299 0.0019 0.2855 (0.7753) 0.1774 0.1784 -0.0010 -0.0734 (0.9415)

2006 0.1407 0.1319 0.0088 1.2832 (0.1997) 0.1976 0.1819 0.0156 1.1000 (0.2715)

2007 0.1545 0.1481 0.0063 0.8486 (0.3962) 0.2268 0.2130 0.0138 0.8508 (0.3950)

2008 0.1686 0.1625 0.0061 0.7831 (0.4337) 0.2542 0.2395 0.0147 0.8537 (0.3934)

2009 0.1939 0.1800 0.0139 1.7098 (0.0875) 0.3030 0.2722 0.0309 1.6476 (0.0997)

2010 0.2001 0.1879 0.0122 1.5045 (0.1327) 0.3100 0.2865 0.0236 1.2518 (0.2109)

2011 0.1983 0.1888 0.0095 1.1463 (0.2518) 0.3109 0.2883 0.0226 1.1880 (0.2350)

Whole sample 0.1346 0.1263 0.0083 4.5761 (0.0000) 0.1946 0.1803 0.0143 3.7287 (0.0002)

45

(Continued) Panel B: Current Assets Ratio

1. Current Assets / Total Assets 2. Current Assets / Net Assets

Year Single

Leadership Dual

LeadershipDifference t-statistic (p-value)

Single Leadership

Dual Leadership

Difference t- statistic (p-value)

1990 0.4821 0.4675 0.0147 0.6316 (0.5281) 0.5345 0.5359 -0.0015 -0.0446 (0.9645)

1991 0.4962 0.4667 0.0295 1.3084 (0.1915) 0.5631 0.5390 0.0241 0.7305 (0.4655)

1992 0.5011 0.4545 0.0466 2.1083 (0.0356) 0.5627 0.5182 0.0446 1.4457 (0.1490)

1993 0.5247 0.4707 0.0540 2.6213 (0.0090) 0.5909 0.5265 0.0644 2.3775 (0.0178)

1994 0.5464 0.5064 0.0399 2.0900 (0.0370) 0.6265 0.5931 0.0334 1.0958 (0.2736)

1995 0.5540 0.5162 0.0377 2.1278 (0.0337) 0.6316 0.5940 0.0376 1.4215 (0.1556)

1996 0.5720 0.5191 0.0529 3.2352 (0.0013) 0.6723 0.6057 0.0666 2.5893 (0.0098)

1997 0.5988 0.5326 0.0663 4.2455 (0.0000) 0.7571 0.6399 0.1172 3.9382 (0.0001)

1998 0.5828 0.5192 0.0636 4.2772 (0.0000) 0.7089 0.6298 0.0791 3.0496 (0.0023)

1999 0.5746 0.5165 0.0580 4.1982 (0.0000) 0.6799 0.6037 0.0761 3.4415 (0.0006)

2000 0.5748 0.5165 0.0583 4.3914 (0.0000) 0.6877 0.6125 0.0752 3.3803 (0.0007)

2001 0.5519 0.5065 0.0454 3.3804 (0.0008) 0.6441 0.5921 0.0520 2.5028 (0.0125)

2002 0.5686 0.5204 0.0482 3.5925 (0.0003) 0.6642 0.6006 0.0636 3.1837 (0.0015)

2003 0.5894 0.5436 0.0457 3.5882 (0.0004) 0.6850 0.6283 0.0567 2.9682 (0.0031)

2004 0.5936 0.5550 0.0386 3.1962 (0.0014) 0.6983 0.6537 0.0447 2.3821 (0.0174)

2005 0.6062 0.5775 0.0287 2.4253 (0.0155) 0.7271 0.6986 0.0285 1.4866 (0.1375)

2006 0.6122 0.5855 0.0267 2.2911 (0.0222) 0.7476 0.7101 0.0375 1.8442 (0.0654)

2007 0.6225 0.5925 0.0300 2.6241 (0.0088) 0.7832 0.7406 0.0426 1.9462 (0.0518)

2008 0.5982 0.5677 0.0306 2.6849 (0.0074) 0.7727 0.7300 0.0426 1.8879 (0.0592)

2009 0.6094 0.5840 0.0254 2.2334 (0.0257) 0.8240 0.7717 0.0523 2.1849 (0.0291)

2010 0.6226 0.5975 0.0251 2.2149 (0.0269) 0.8424 0.7968 0.0455 1.9187 (0.0552)

2011 0.6210 0.5954 0.0256 2.2582 (0.0241) 0.8406 0.7933 0.0473 2.0024 (0.0454)

Whole sample 0.5869 0.5455 0.0414 13.9003 (0.0000) 0.7214 0.6657 0.0557 10.6494 (0.0000)

46

Table 11 Average Cash Ratios Sorted by Information Transparency The sample includes all TEJ firm-year observations from 2003 to 2011 with no missing values for cash and cash equivalents and is sorted by information transparency. Since the data for information transparency is not available before 2003, the results are reported from 2003. We exclude the samples with net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the data set. Firms are assigned to subsample each year according to the rank of information transparency. Cash ratios and current asset ratios are winsorized at the 1% level on either tail to avoid outliers. Variable definitions are provided in the Appendix A.

High

information transparency

Low information transparency

Difference t-statistic (p-value) High

information transparency

Low information transparency


Panel A: Cash Ratio

Year 1. Cash / Total Assets 2. Cash / Net Assets 2003 0.0972 0.0970 0.0002 0.0269 (0.9786) 0.1206 0.1289 -0.0083 -0.7867 (0.4318) 2004 0.1130 0.1097 0.0033 0.4861 (0.6270) 0.1439 0.1465 -0.0025 -0.1970 (0.8439) 2005 0.1419 0.1206 0.0213 2.1463 (0.0330) 0.1997 0.1562 0.0435 2.0669 (0.0400) 2006 0.1348 0.1249 0.0099 1.1831 (0.2370) 0.1834 0.1677 0.0157 0.9407 (0.3471) 2007 0.1488 0.1361 0.0127 1.3818 (0.1673) 0.2090 0.1898 0.0193 0.9894 (0.3227) 2008 0.1783 0.1500 0.0283 3.2323 (0.0013) 0.2678 0.2133 0.0546 2.7262 (0.0066) 2009 0.1873 0.1766 0.0108 1.2001 (0.2304) 0.2859 0.2657 0.0202 0.9801 (0.3272) 2010 0.1870 0.1834 0.0036 0.4285 (0.6684) 0.2805 0.2760 0.0045 0.2363 (0.8132) 2011 0.1825 0.1882 -0.0057 -0.7057 (0.4805) 0.2665 0.2872 -0.0207 -1.1779 (0.2391)

Whole sample 0.1589 0.1380 0.0208 7.4483 (0.0000) 0.2292 0.1950 0.0342 5.7239 (0.0000) Panel B: Current Asset Ratio

Year 1. Current Assets / Total Assets 2. Current Assets / Net Assets 2003 0.5521 0.5572 -0.0051 -0.3507 (0.7259) 0.6271 0.6470 -0.0200 -1.0366 (0.3004) 2004 0.5673 0.5646 0.0027 0.1947 (0.8456) 0.6613 0.6625 -0.0012 -0.0589 (0.9531) 2005 0.5710 0.5789 -0.0079 -0.4523 (0.6512) 0.7063 0.6810 0.0254 0.8364 (0.4038) 2006 0.5789 0.5879 -0.0089 -0.5590 (0.5763) 0.7019 0.7003 0.0016 0.0625 (0.9502) 2007 0.5946 0.5939 0.0007 0.0442 (0.9647) 0.7381 0.7243 0.0138 0.4994 (0.6176) 2008 0.5769 0.5701 0.0068 0.5042 (0.6142) 0.7589 0.7123 0.0466 1.7798 (0.0756) 2009 0.5928 0.5894 0.0034 0.2621 (0.7933) 0.7901 0.7734 0.0167 0.6317 (0.5277) 2010 0.6056 0.6084 -0.0028 -0.2291 (0.8188) 0.7984 0.8026 -0.0041 -0.1683 (0.8663) 2011 0.5988 0.6096 -0.0108 -0.9307 (0.3522) 0.7786 0.8099 -0.0313 -1.3640 (0.1728)

Whole sample 0.5849 0.5820 0.0030 0.6514 (0.5148) 0.7400 0.7153 0.0247 3.0472 (0.0023)

47

Table 12 Regressions Estimating the Determinants of Cash Holdings The sample includes all TEJ firm-year observations from 1990 to 2011 with no missing values for cash and cash equivalents. We exclude the samples that net assets equal to zero in order to calculate the correct cash ratios. Financial firms are also excluded from the sample, yielding a panel of 22,587 observations. p-values based on standard errors robust to clustering by firm and year are reported in parentheses for the OLS regressions. Variable definitions are provided in the Appendix A. *, **, and *** represent significance at the 10%, 5% and 1% levels, respectively.

Panel A: Cash/Total Assets

Model

1 2 3 4 5 6 7

OLS OLS OLS OLS Industry fixed

effects Year fixed

effects Changes

Control – ownership

-0.0026 -0.0074 0.0018 -0.0077 -0.0022 (0.8110) (0.5630) (0.8880) (0.5470) (0.8590)

Group affiliation -0.0071** -0.0099*** 0.0021 -0.0099*** -0.0082**

(0.0100) (0.0020) (0.5090) (0.0020) (0.0100)

Family control -0.0215*** -0.0184*** -0.0119*** -0.0182*** -0.0159***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Board independence

0.1310*** 0.1107*** 0.0654*** 0.1105*** 0.1036***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Board size -0.0019*** -0.0035*** -0.0026*** -0.0035*** -0.0032***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Chair duality 0.0007 0.0007 0.0049* 0.0007 -0.0016

(0.7180) (0.7760) (0.0520) (0.7990) (0.5170)


0.0087*** 0.0080*** 0.0052*** 0.0078*** 0.0074***

(0.0000) (0.0000) (0.0010) (0.0000) (0.0000)

Lag dcash 0.2838***

(0.0000)

Lag cash 0.0000***

(0.0000)

Firm size -0.0068*** -0.0041*** -0.0117*** -0.0051*** -0.0092*** -0.0051*** -0.0090***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Leverage -0.2241*** -0.2535*** -0.2472*** -0.2402*** -0.2644*** -0.2392*** -0.2263***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

M/B ratio 0.0562*** 0.0601*** 0.0758*** 0.0396*** 0.0546*** 0.0390*** 0.0465***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Cash flow ratio 0.1661*** 0.1520*** 0.1625*** 0.1541*** 0.1159*** 0.1587*** 0.1392***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

NWC to total assets

-0.1411*** -0.1553*** -0.1705*** -0.1676*** -0.1956*** -0.1662*** -0.1568***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

R&D to sales 0.4087*** 0.4015*** 0.4721*** 0.4099*** 0.3088*** 0.4088*** 0.4058***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Capital expend.ratio

-0.0108 -0.0092 0.0046 -0.0175 -0.0451*** -0.0167 -0.0264

(0.4430) (0.4470) (0.7640) (0.2930) (0.0070) (0.3150) (0.1040)

Cash flow volatility

0.3155*** 0.2972*** 0.3265*** 0.2799*** 0.2133*** 0.2808*** 0.2802***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Dividend dummy 0.0202*** 0.0148*** 0.0248*** 0.0247*** 0.0283*** 0.0248*** 0.0246***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Constant 0.0539*** 0.1236*** 0.0745*** 0.0312 0.1679*** 0.1950*** 0.0896***

(0.0010) (0.0000) (0.0000) (0.1260) (0.0000) (0.0000) (0.0000)

Industry d

Yes Yes Yes Yes No Yes Yes

Year dummies Yes Yes Yes Yes Yes No Yes

Observations 9758 12532 8086 7014 7014 7014 7014 Adjusted R2 0.3539 0.3684 0.3561 0.3693 0.3393 0.3415 0.3996

48

(Continued)

Panel B: Cash/Net Assets

Model 1 2 3 4 5 6 7

OLS OLS OLS OLS Industry fixed

effects Year fixed

effects Changes

Control – ownership

0.0301 0.0216 0.0386 0.0207 0.0313 (0.1930) (0.4460) (0.1770) (0.4640) (0.2520)

Group affiliation -0.0104* -0.0171** 0.0062 -0.0171** -0.0129*

(0.0800) (0.0170) (0.3880) (0.0160) (0.0620)

Family control -0.0329*** -0.0266*** -0.0178*** -0.0263*** -0.0219***

(0.0000) (0.0000) (0.0100) (0.0000) (0.0010)

Board independence

0.2392*** 0.1983*** 0.1232*** 0.1985*** 0.1816***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Board size -0.0031*** -0.0070*** -0.0056*** -0.0070*** -0.0064***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Chair duality 0.0003 0.0010 0.0055 0.0011 -0.0010

(0.9390) (0.8590) (0.3330) (0.8410) (0.8580)


0.0141*** 0.0131*** 0.0093*** 0.0128*** 0.0119***

(0.0000) (0.0000) (0.0070) (0.0000) (0.0000)

Lag dcash 0.3699***

(0.0000)

Lag cash 0.0000***

(0.0000)

Firm size -0.0164*** -0.0103*** -0.0256*** -0.0138*** -0.0209*** -0.0136*** -0.0204***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Leverage -0.4662*** -0.5102*** -0.5172*** -0.4999*** -0.5571*** -0.4971*** -0.4618***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

M/B ratio 0.1331*** 0.1415*** 0.1755*** 0.1049*** 0.1340*** 0.1029*** 0.1163***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Cash flow ratio 0.3193*** 0.2905*** 0.3316*** 0.3219*** 0.2514*** 0.3304*** 0.2870***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

NWC to total assets

-0.3369*** -0.3508*** -0.3965*** -0.3944*** -0.4612*** -0.3918*** -0.3644***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

R&D to sales 0.8054*** 0.8241*** 0.9571*** 0.8360*** 0.6692*** 0.8332*** 0.8278***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Capital expend.ratio

-0.0912*** -0.0781*** -0.0420 -0.0941** -0.1160*** -0.0924** -0.1135***

(0.0030) (0.0030) (0.2120) (0.0100) (0.0020) (0.0120) (0.0010)

Cash flow volatility

0.7697*** 0.7273*** 0.8355*** 0.7279*** 0.6046*** 0.7280*** 0.7039***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Dividend dummy 0.0311*** 0.0211*** 0.0401*** 0.0397*** 0.0476*** 0.0402*** 0.0392***

(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)

Constant 0.1412*** 0.2308*** 0.1755*** 0.0988*** 0.3390*** 0.3851*** 0.2064***

(0.0000) (0.0000) (0.0000) (0.0280) (0.0000) (0.0000) (0.0000)

Industry d

Yes Yes Yes Yes No Yes Yes

Year dummies Yes Yes Yes Yes Yes No Yes

Observations 9758 12532 8086 7014 7014 7014 7014 Adjusted R2 0.3000 0.3184 0.3094 0.3161 0.2978 0.2977 0.3617

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