Corporate cash holdings are critical decisions for businesses. Companies keep cash reserves to capitalize on opportunities to invest in profitable projects and earn positive returns for shareholders. Current literature shows that companies have different motives to reserve cash, including transaction motives, precautionary motives, agency motives, tax motives, and predation motives (Tran 2020). Prior research has shown that cash holdings are associated with overinvestments in unprofitable projects and higher agency costs (Jensen 1986; Opler et al. 1999). This research is motivated by the fact that, despite being a critical corporate policy in determining potential returns to investors (Chen et al. 2015), corporate cash-holding decisions can be influenced by behavioral biases and managerial characteristics (Huang and Kisgen 2013). The existing literature focuses on the importance of corporate boards in reducing the agency problem of corporate cash holding choices (Tong 2010). In this study, we look at the link between board gender diversity and corporate cash holdings in this study (CCHs).
In 2019, a staggering 46% of new directors added to the S&P 500 companies’ boards were women (Bloomberg 2019). As a result, women on corporate boards have received increased attention from the research community and academia, particularly on the effect on companies’ performances, particularly the return on investments, productivity, and share value (Post and Byron 2015). Previous studies concerning gender diversity conclude that female executives are less tolerant of managers’ opportunistic behaviors (Peni and Vähämaa 2010). Further, they are less likely to pursue risky corporate policies (Huang and Kisgen 2013) and are associated with lower agency costs (Jurkus et al. 2011). Xu et al. (2019) have examined the role of the CFO’s gender on corporate cash holdings and its underlying mechanism. This is different from the studies conducted by Zeng and Wang (2015) and Adhikari (2018), which analyze the impact of the gender of CEOs and the proportion of female executives on cash holdings, respectively. In the empirical research, however, little is known about how board gender diversity affects managers’ opportunistic behaviors in corporate cash holding decisions.
Studies have shown that companies in countries with weak investor protection measures tend to hold more cash reserves than those in countries with strong investor protection (Dittmar et al. 2003). Chang and Noorbakhsh (2006, 2009) concluded that firms tend to have a smaller proportion of cash and cash equivalents in total assets in countries with more substantial shareholder rights or in those countries that belong to the common law system. Additionally, Seifert and Gonenc (2018) found that stronger country-level governance decreases cash holdings. However, unlike these studies, Iskandar-Datta and Jia (2014) and Tran (2020) found a positive impact of shareholder protection on corporate cash reserves. In the context of the agency problem, Kuan et al. (2012) posited that investor protection and corporate governance aim to decrease cash levels. However, studies on the relationship between women’s presence on the board of directors, investor protection, and corporate cash holdings remain scarce. Based on the above-mentioned previous studies, I and some foreign partner, Wan Adibah Wan Ismail, Khairul Anuar Kamarudin, dan Namrata Gupta are trying to prove whether gender diversity in boardrooms can be attributed to a company’s cash holdings and whether investor protection can moderate the effects of both variables.
Method and Result
We are using 20,750 firm-year observations from 33 countries during the 2009−2018 period. In this study, corporate cash holding is defined as the proportion of cash and equivalents to total assets. We measure board gender diversity based on the proportion of women on the board and the Blau (1977) index of heterogeneity. For investor protection, we use annual country-level data of the strength of the investor protection index provided by the World Economic Forum and the anti-self-dealing index reported in Djankov et al. (2008).
Our analyses show that firms with high levels of corporate board gender diversity exhibit low corporate cash holdings. Furthermore, firms in countries with high levels of investor protection have low corporate cash holdings. Moreover, the negative association between board gender diversity and corporate cash holdings is weaker in high-level investor protection countries than in low-level investor protection countries. Our results are robust to various specification tests, such as the endogeneity issue, weighted least-squares regression, the global economic crisis effect, alternative measures for corporate cash holdings, and various country-level institutional features.
Author: Iman Harymawan, S.E., MBA., Ph.D.
Details of the research can be viewed here:
https://www.mdpi.com/2227-9091/10/3/60
Wan Ismail, W. A., Kamarudin, K. A., Gupta, N., & Harymawan, I. (2022). Gender Diversity in the Boardroom and Corporate Cash Holdings: The Moderating Effect of Investor Protection. Risks, 10(3), 60.
