Abstract

This study investigates the effect of corporate governance on the value relevance of cash holding ratio among Korean listed firms (KOSPI) belongs to Korean business group over the period 2001－2010. Especially this paper focuses on cash holdings because of high liquidity. This paper introduces cash holding ratio which is proxied by the sum of cash and short－term financial instruments divided by net assets. This paper uses market value as the proxy for market response, wedge as the proxy for corporate governance. Wedge means the difference between voting rights and cash flow rights of controlling shareholders. It could be possible that wedge gives controlling shareholders power to seek private benefits at the cost of outside shareholders. This paper tests whether high cash holding ratio is associated with low market value regarding low corporate governance. The regression result shows that corporate governance affects the association between cash holding ratio and market value. This result suggests that without properly controlling for corporate governance, estimating the association between cash holding ratio and market value leads to an erroneous inference regarding the effect of cash holdings on market value. To check this result for robustness, the effect of corporate governance on the association between cash holding ratio and market value is examined after introducing cash holdings variable using cash divided by net assets. This paper also tests the effect of corporate governance on the association between cash holding ratio and market value after controlling for foreign investors. The results show that the main result of this study is robust.

Keywords

• cash holding ratio
• value relevance
• wedge
• foreign investors

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