Corporate governance and cash holding decisions of firms: A dynamic panel data analysis

When a company holds excessive cash, managers exhibit their self-interest and maximisation of firm value is hindered. When laws protect investor well, agency costs which is expected between manager and investor are low and firms hold less money because obtaining external capital is easy. On the other hand, ownership concentration fulfils function of corporate governance mechanism by increasing in countries where laws do not protect investors well. Capital markets are not well developed in countries with poor shareholder protection. This implies that the transactions costs of raising additional funds are higher, and firms may respond to this by holding higher cash balances. In this study, 1168 companies? data from 10 emerging markets and the determinatives of cash which companies have in the term of between 1991 and 2008 were estimated by using dynamic panel data analysis. This study focus on the importance of corporate governance issues. However, legal and institutional characteristics such as ownership concentration, degree of shareholder and creditor protection are included in empirical analysis. There is a strong support that ownership concentration(mlkiyetyog) and investor protection exerts a negative impact on cash holdings of firms. According to outcomes of GMM analysis, the dynamic effects are important in the determination of firms? cash holdings. Whereas, liquid assets, leverage and capital expenditures affect negatively the the cash balances and cash flows of firms have positive impact on their cash holdings. Surprisingly, the companies, which have an opportunity to invest, have more cash in contrary to theory. It is found out that, firms in Turkey, New Zealand, India and Argentina reach rapidly to the target cash level.