Internal corporate governance and cash holdings: the role of external governance mechanism

Abstract

This study investigates how decisions about cash holdings are impacted by internal corporate governance mechanisms in the presence of external governance mechanisms (shareholders’ and creditors’ rights). On the data of listed manufacturing firms in the ASEAN-5 from 2005 to 2020, the fixed-effect and generalized method of moment models are employed. The results demonstrate that strong external governance mechanisms mitigate the negative impact of weak internal governance methods, such as a higher level of managerial ownership, a larger board, and CEO dual roles. This suggests that strong external governance mechanisms can help mitigate cash wastage and higher agency issues brought on by weak internal governance. However, when there is a presence of strong external governance mechanism, strong internal governance practices such as lower managerial ownership levels, a founder-CEO, and an independent board do not permit corporations to store more cash to avoid cash misuse. This is the first study that reveals how internal corporate governance mechanisms affect the choice to keep cash in the presence of strong and weak external governance mechanisms.