Corporate Governance and Cash Holdings: Listed New Economy versus Old Economy Firms

While firms in new economy industries may be eager for more flexible governance codes in order to maintain the freedom of decision making, the evidence from this study suggests that establishing effective governance mechanisms may, in turn, effectively enlarge the degree of freedom for these firms to make timely business decisions. This study provides empirical support for the association between agency theory and cash theories. Given different firm characteristics, the impact of corporate governance on cash holdings verifies the implication of agency theory in explaining corporate cash policy. By examining American Standard and Poor 1,500 companies, the evidence shows that CEO ownership and board independence affect the cash holdings in listed new economy and old economy firms differently. Specifically, higher managerial cash holdings tend to reduce cash holdings in old economy firms and higher board independence tend to increase cash holdings in listed new economy firms. This study examines the impact of corporate governance on the cash-holding policies of firms with different investment opportunities. It is difficult to determine the optimal level of cash holdings for listed new economy firms (firms in the computer, software, Internet, telecommunications, or networking industries), which require large amounts of capital for investment opportunities with high return potential. Unlike in old economy firms, for which investment opportunities are relatively limited, corporate governance in listed new economy firms may create shareholder protections that make investors willing to accept higher levels of corporate cash holdings. Empirical. This study examines the impact of corporate governance on the cash-holding policies of firms with different investment opportunities. It is difficult to determine the optimal level of cash holdings for listed new economy firms (firms in the computer, software, Internet, telecommunications, or networking industries), which require large amounts of capital for investment opportunities with high return potential. Unlike in old economy firms, for which investment opportunities are relatively limited, corporate governance in listed new economy firms may create shareholder protections that make investors willing to accept higher levels of corporate cash holdings. By examining American Standard and Poor 1,500 companies, the evidence shows that CEO ownership and board independence affect the cash holdings in listed new economy and old economy firms differently. Specifically, higher managerial cash holdings tend to reduce cash holdings in old economy firms and higher board independence tend to increase cash holdings in listed new economy firms. This study provides empirical support for the association between agency theory and cash theories. Given different firm characteristics, the impact of corporate governance on cash holdings verifies the implication of agency theory in explaining corporate cash policy. While firms in new economy industries may be eager for more flexible governance codes in order to maintain the freedom of decision making, the evidence from this study suggests that establishing effective governance mechanisms may, in turn, effectively enlarge the degree of freedom for these firms to make timely business decisions.