n?u=RePEc:mad:wpaper:2015-135&r=cfn

repec.nep.cfn

n?u=RePEc:mad:wpaper:2015-135&r=cfn

WORKING PAPER 135/2015

DOES CORPORATE GOVERNANCE MATTER

IN DETERMINANTS AND USE OF CASH:

EVIDENCE FROM INDIA

Saumitra Bhaduri

Ekta Selarka

MADRAS SCHOOL OF ECONOMICS

Gandhi Mandapam Road

Chennai 600 025

India

December 2015


Does Corporate Governance Matter

in Determinants and Use of Cash:

Evidence from India

Saumitra Bhaduri

Professor, Madras School of Economics

saumitra@mse.ac.in

and

Ekta Selarka

Assistant Professor, Madras School of Economics

ekta@mse.ac.in

i


WORKING PAPER 135/2015

December 2015

Price : Rs. 35

MADRAS SCHOOL OF ECONOMICS

Gandhi Mandapam Road

Chennai 600 025

India

Phone: 2230 0304/2230 0307/2235 2157

Fax : 2235 4847/2235 2155

Email : info@mse.ac.in

Website: www.mse.ac.in

ii


Does Corporate Governance Matter in

Determinants and Use of Cash: Evidence

from India

Saumitra Bhaduri and Ekta Selarka

Abstract

Our study investigates the determinants and use of cash holdings by

Indian companies. Using a large sample of manufacturing firms that are

publicly traded on Bombay Stock exchange for the period of 1998-2012,

we present a dynamic panel data regression framework to accommodate

the persistence in cash holdings which is typically ignored in the

literature. We find significance evidence of persistence in corporate cash

holdings of Indian firms. Using this framework, we predict the excess

cash holdings and find that firms with higher concentration of insider

ownership as well as higher divergence between cash flow and control

rights of insiders hold positive excess cash. Not only they hold excess

cash but they accumulate cash holdings. The study also finds that

business groups on average hold higher cash reserves but at the same

time, dissipate cash over time quickly then their standalone counterparts.

Further, we find that positive excess cash positively affects dividend

payout and propensity to acquisitions. However the study finds that

corporate governance plays no role in disbursement of excess cash as

dividends or undertaking acquisitions. This indicates absence of agency

motive in explaining the dividend payout and propensity of firms to

acquire.

Keywords: Cash holdings, Ownership concentration, corporate

governance, India

JEL Codes: G32, G34

iii

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