Does Corporate Governance Matter in Determinants and Use of Cash: Evidence from India

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.