Corporate Excess Cash Holdings and Firm Value under Governance Consideration

We empirically examine the value information effect of excess cash holding by using agency and governance - related variables either individually or in combination. Our study extends the existing understanding of the market responses to the past, current, and future financial policies regarding excess cash holding and especially under the constraints of governance variables. Test results indicate that although current excess cash holding frequently hampers firm value, the past and future excess cash holding occasionally promote firm value. In addition, corporate policies related to the reduction of excess cash holding contribute to increasing the overall firm value. The effect of excess cash holding on firm values differs according to firm characteristics such as whether excess cash holding is positive or negative, or market conditions like the Asian financial crisis of 1997. Further, excess cash holdings react differently in determining firm value to different governance variables such as chaebol affiliation, ownership concentration and degree of diversification. This implies that the corporate governance structure significantly influences the manner in which excess cash holding affects firm value.