Cash Holdings and Corporate Governance –

In this paper, we provide new and complementing international evidence on the relation between cash holdings, corporate governance, and firm value. Our sample consists of a crosssection of 1,875 firms from 46 countries in 2007. We construct eight different measures of firm-level corporate governance based on 64 individual governance attributes provided by Governance Metrics International (GMI). We present three new main findings. First, firms with poor firm-level governance hold significantly more cash than firms with better firm-level governance. Second, we document a positive effect of cash holdings on firm value for firms with good firm-level corporate governance. A likely explanation is that in firms with weak firmlevel governance, higher cash holdings might be exploited by the management and invested in negative-NPV projects. Third, we find that a payout of excess cash by means of dividend payments, which reduces the possibility for managers to waste cash on negative-NPV projects, also positively affects the valuation effect of cash holdings. Moreover, firms with comparatively low firm-level corporate governance can still profit from cash holdings if they maintain relatively high dividend payout ratios. We control for country-level corporate governance in our analyses but find its effect to be limited and dominated by the effect of firm-level governance.