TY - JOUR
T1 - Control-ownership wedge, board of directors, and the value of excess cash
AU - Belkhir, Mohamed
AU - Boubaker, Sabri
AU - Derouiche, Imen
PY - 2014/4
Y1 - 2014/4
N2 - This study investigates the effects of the separation of control and ownership on the value of cash holdings in publicly listed French firms. It also sheds light on the role of board independence in such a relation. Theory suggests that investors are more likely to discount the value of excess cash held by firms with low corporate governance. Using the valuation regression of Fama and French (1998), empirical results show that the value of excess cash holdings decreases dramatically with the separation of control and cash-flow rights of the controlling shareholder. This value discount is, however, less pronounced in firms with more independent boards (i.e., boards with more independent directors and separate chief executive officer and chair positions). Our empirical findings support the argument that excess cash contributes less to firm value when minority shareholders are more likely to be expropriated by controlling shareholders. Independent boards seem to be effective in mitigating investors' concerns about the use of excess cash. Overall, the results provide compelling evidence that cash valuation is largely influenced by corporate governance quality in a concentrated ownership setting.
AB - This study investigates the effects of the separation of control and ownership on the value of cash holdings in publicly listed French firms. It also sheds light on the role of board independence in such a relation. Theory suggests that investors are more likely to discount the value of excess cash held by firms with low corporate governance. Using the valuation regression of Fama and French (1998), empirical results show that the value of excess cash holdings decreases dramatically with the separation of control and cash-flow rights of the controlling shareholder. This value discount is, however, less pronounced in firms with more independent boards (i.e., boards with more independent directors and separate chief executive officer and chair positions). Our empirical findings support the argument that excess cash contributes less to firm value when minority shareholders are more likely to be expropriated by controlling shareholders. Independent boards seem to be effective in mitigating investors' concerns about the use of excess cash. Overall, the results provide compelling evidence that cash valuation is largely influenced by corporate governance quality in a concentrated ownership setting.
KW - Board of directors
KW - Cash holdings
KW - Control-ownership wedge
KW - Corporate governance
KW - Firm value
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U2 - 10.1016/j.econmod.2014.02.026
DO - 10.1016/j.econmod.2014.02.026
M3 - Article
AN - SCOPUS:84896507082
SN - 0264-9993
VL - 39
SP - 110
EP - 122
JO - Economic Modelling
JF - Economic Modelling
ER -