Corporate Cash Holdings, Board Structure, and Ownership Concentration:
Evidence from Singapore
Yuanto Kusnadi*
Department of Finance, School of Business and Management
Hong Kong University of Science and Technology
Clear Water Bay, Kowloon, Hong Hong
Email: yuanto@ust.hk
Phone: (852) 2358-4227
Fax: (852) 2358-1749
This draft: October 2003
*
Corresponding author. I am grateful to John Wei, TJ Wong, Sudipto Dasgupta, Vidhan Goyal, and Joseph Fan for helpful
comments and discussions. I also acknowledge the financial support from the Hong Kong University of Science and
Techonology Postgraduate Research Studentship. All remaining errors are mine.
1
Corporate Cash Holdings, Board Structure and Ownership Concentration:
Evidence from Singapore
Abstract
Corporations hold cash balances for a variety of reasons. We document that board size and nonmanagement blockholder ownership are significantly related to the ratio of cash to net assets for a
sample of publicly listed firms in Singapore. While the relationship between board size and cash
holdings is positive and significant, non-management blockholder ownership is inversely related to
cash holdings. Our findings are consistent with the agency cost hypothesis. Since firms with large
boards and low non-management blockholder ownership are normally poorly governed, shareholders
of such firms do not have much power in forcing the managers to distribute the excess cash to them.
As a result, those firms hold higher cash balances than firms who have better control mechanisms (ie:
small board and large non-management blockholder ownership).
2
1. Introduction
One of the main benefits often cited by companies is that having large cash helps to fund
capital investments, especially when internal funds are cheaper than external funds. However, there is
a growing concern that managers of cash-rich firms are subject to more severe agency problems.
According to Jensen (1986), when managers have more free cash flow at their disposal, they are likely
to overinvest in negative NPV projects, at the expense of the shareholders or consume more
discretionary perquisites which increase their private benefits.1
Very few studies have actually looked at what determines the level of corporate cash holdings
(particularly in Asia). Opler, Pinkowitz, Stulz, and Williamson (1999) examine the determinants and
consequences of corporate cash holdings for publicly listed firms in the U.S. Their findings suggest
that there is an optimal level of cash balance. Growth opportunities (as measured by market-to-book)
and volatility of cash flows are both positively related to cash holdings. Moreover, large firms tend to
hold more cash. In general, they provide evidences which support the static trade-off model of cash
holdings.
A recent paper by Dittmar, Mahrt-Smith, and Servaes (2003) explores the relationship between
corporate governance and corporate cash holdings. They find that one important determinant of
corporate cash holdings is the shareholders rights variable (which proxies for corporate governance).
Firms in countries with poor shareholder protection (poor corporate governance) tend to hold larger
cash balances. They find that firms hold more cash even when their capital market is developed, which
is consistent the agency-cost explanation of cash holdings. Hence, shareholders in countries with poor
shareholder protection do not have strong power in preventing the managers from disgorging the
excess cash.
1
See Lang, Stulz, and Walkling (1991), Blanchard, Lopez-de-Silanes, and Shleifer (1994), Harford (1999) for empirical
evidences on the value destroying activities that that cash rich firms undertake.
3
In this paper, we attempt to extend the cross-sectional studies on the relationship between
corporate governance and corporate cash holdings by using firm-specific data from Singapore.2 Since
past studies have not looked at the impact of corporate governance mechanisms on the level of
corporate cash holding, the availability of data on the corporate governance mechanisms allow us to
examine some interesting issues in more detail.
Specifically, we want to test if firm-specific variables such as board size, the proportion of
independent directors, managerial ownership (direct and indirect), non-management blockholder
ownership, government ownership, and other firm-specific variables (age, disclosure of corporate
governance practice, presence in mainboard, CTI (Corporate Transparency Index) score, and auditor),
could determine the level of cash balances that the firm holds.
We find that market-to-book (which proxies for investment opportunities) and capital
expenditures are positively related to cash holdings, which are similar to that found by previous
studies. Board size (non-management blockholder ownership) is positively (inversely) related to cash
holdings. Our findings confirm the importance of corporate governance in the determination of
corporate cash holdings and provide evidence that is consistent with the agency cost explanation as
documented by Dittmar et al. (2003). Small boards tend to be more efficient and are associated with
higher valuation (Yermack, 1996). Non-management blockholders also help to alleviate the conflict of
interest between managers and shareholders by acting as monitors (Lins, 2003).
In general, large boards and low non-management blockholder ownerships are associated with
more severe agency problem, which implies poor corporate governance. Managers of such firms have
no incentive to distribute the excess cash back to the shareholders because of the lack of monitoring.
As a consequence, these firms hold more cash than firms with more effective corporate governance.
See “ST Engineering says no change to dividend policy”, 8 th July 2003, AFX News Limited for an example of the
dividend policy of a publicly listed company in Singapore with large cash balance.
2
4
Our results are robust to alternative definition of cash holdings as well as to specifications involving
additional control variables.
Our paper is organized as follows: Section 2 discusses the related studies on corporate
governance and corporate cash holdings. Section 3 describes our sample, which is followed by the
empirical tests and discussion of the results in Section 4. Section 5 concludes the paper.
2. Related literatures on corporate governance and corporate cash holdings
A recent survey by Dennis and McConnell (2003) divide the current literature on international
corporate governance into two broad categories. The first generation of research replicates issues
which have been found to be pertinent in the U.S. into an international setting. The second generation
of research takes into account the legal environments and compares the effectiveness of corporate
governance mechanisms across different systems.
2.1 Board structure and ownership concentration
The separation of ownership and control is a central theme in the corporate governance
literature. Berle and Means' (1932) influential study changed the perspective of the modern corporation
and initiated the debate on the agency problem. Given the separation of ownership and control, and
diversified ownership, shareholders no longer have the incentive to monitor the performance of a
specific firm, since this firm only represents a fraction of their total investment. Given the lack of
incentive for shareholders to monitor, managers can collude among themselves and expropriate the
shareholders by consuming more discretionary perquisites (e.g.: first class airplane tickets, plush
company cars, paying themselves high salaries and bonuses, etc) or pursuing projects that may only
give a small return on investment to the shareholder. Hence, the conflict of interest between
5
shareholders and managers implies there is no guarantee that shareholders interests will be the sole
important factor managers consider in the running of a corporation.
Subsequently, Jensen and Meckling (1976) introduce a new definition of "the firm". According
to them, the agents are bounded by contracts and although each agent pursues his/her own self-interest,
they must function as a team in order to attain success. Fama (1980) and Fama and Jensen (1983)
extend this contractual viewpoint of the firm and suggest that despite the problems mentioned
previously, firms characterized by the separation of ownership and control can still survive. As long as
there are appropriate internal and external mechanisms, such as managerial ownership, boards of
directors, labor market for managers, and corporate control market, to discipline the agents (especially
managers), the firm can still function efficiently and effectively.
Numerous studies have analyzed the costs and benefits of the dispersed ownership structure
that is common in the U.S. In particular, Shleifer and Vishny (1986) assess whether large minority
shareholders can minimize the free-rider problem (Grossman and Hart, 1980) that is associated with a
dispersed ownership structure. When their shareholdings increase, investors can take a more proactive
role in monitoring the managers, to the extent that they can even replace the managers by mounting a
takeover bid. However, there are also worries that high ownership concentration by minority
shareholders can work to the other shareholders' disadvantage.
Demsetz and Lehn (1985) find that ownership structure is related to firm size, firm specific
uncertainty and systematic regulation. While smaller firms and those that do not belong to regulated
industries are characterized with dispersed ownership, firms operating in riskier environments tend to
have more concentrated ownership. They also test the Berle and Means prediction that concentrated
ownership structure will have a positive effect on firm performance. Their results show that there is no
6
apparent evidence of a significant relationship between ownership structure and corporate performance
(measured by accounting profit rate). This is consistent with the findings in Demsetz (1983).
On the other hand, Morck, Schleifer, and Vishny (1988), Stulz (1988), and McConnell and
Servaes (1990))document that firm value is related to ownership structure in the U.S.. There seems to
be a non-linear relationship between firm value and insider equity ownership. The benefits of having a
large inside shareholder peak at a certain point, beyond which the benefits will be significantly
outweighed by the costs, such that it will no longer make economic sense to have a concentrated
ownership structure.3
The effectiveness of the board of directors as a monitoring mechanism has also been widely
studied (John and Senbet, 1998). These studies have focused on two board attributes: board size and
and board composition. A large board tends to be less effective (Jensen, 1993), as decision-making
becomes slower due to the involvement of more people. Yermack (1996) finds an inverse relationship
between Tobin's Q and board size, supporting the hypothesis that a small board improves firm value.
Boards of directors are often passive because they have the tendency to be friendly to
management. As a result, they do not perform as expected in terms of their responsibilities in
disciplining and monitoring the managers. This motivates the need to employ outsiders into the board.4
Outside directors are those who do not have a family or business relationship with the managers of the
firm. Similar to the issue of blockholder ownership, the studies on the effect of outside directors on the
agency problem yield mixed findings. While some studies find that outside directors align the interests
3
McConnell and Servaes (1990) find that the relationship between insider equity ownership and Tobin's Q is an inverted U
shape, with Tobin's Q reaching its maximum value when insiders own approximately 40 percent of the shares. Morck et al.
(1988) uncover a slightly different relationship. Initially, Tobin's Q rises as insider ownership rises to 5 percent.
Subsequently, it falls as ownership increases to 25 percent and only rises slightly beyond that point.
4
Baysinger and Butler (1985) document an increasing trend towards board independence in the 1970s. Those firms with
greater board independence at the beginning of the decade have better performance at the end of the decade. It seems to
suggest that board independence induce a positive impact on firm performance.
7
of managers and shareholders5, there are also studies that advise against having more outside
directors.6
2.2 Corporate governance in emerging markets
Research on corporate governance systems in countries outside the U.S. and U.K. is growing at
a rapid pace. Recent papers have looked at the corporate governance mechanisms (board composition
and ownership structure) in Asia, Europe, and other emerging markets.
La Porta, Lopez-De-Silanes, and Shleifer (1999) trace the ultimate ownership of the 20 largest
corporations in 27 wealthiest economies and find that with the exception of those economies which
enjoy good shareholder protection (eg: Australia, Canada, U.K., and U.S.), only a number of the
economies are characterized by dispersed ownership structure (as suggested by Berle and Means
(1932)). More interestingly, they find that family and state control are relatively common in many
emerging markets (eg: Argentina, Hong Kong, Singapore, Belgium, and others). In addition, the
controlling shareholders typically have control rights which exceed their cash-flow rights, resulting in
the expropriation of minority shareholders by the controlling shareholders. They suggest that one
potential solution is to introduce legal reforms, especially in emerging markets.
Claessens, Djankov, and Lang (2000) examine the separation of ownership and control in a
sample of 2,980 companies in 9 East-Asian countries. They document that Asian companies are
characterized by concentrated ownership structures, with more than two-thirds of the firms controlled
by a single shareholder. The controlling family exercises their control rights (which exceed their cash
flow rights) through the use of cross-shareholdings and pyramid structures. The fact that the top
5
Fama (1980) and Fama and Jensen (1983) claim that outside directors are disciplined by the managerial labor market,
while Brickley, Coles, and Terry (1994) find that as more outside directors are employed, the stock market reacts
positively to the adoption of a poison pill.
8
managements are often linked to the controlling families further exacerbates the agency problems
minority shareholders face, which supports the findings by La Porta et al. (1999). Another interesting
finding they uncover is that the largest ten families in Indonesia, Philippines, and Thailand have
control over the majority of the companies in their sample, which suggests the dominant role family
shareholdings play in Asia (except for Japan, where most of the firms are widely held). State control is
also found to be prevalent in Indonesia, Malaysia, Singapore, Korea, and Thailand.
A follow up study by Claessens, Djankov, Fan, and Lang (2002) document the benefits as well
as costs of large shareholdings using a sample 1,301 publicly listed firms in eight East-Asian countries
(with Japan being excluded from the original sample). They find that there is an incentive effect, ie:
when the cash-flow rights of the largest shareholder increases, firm value increases. However, as the
wedge between control rights of the largest shareholder and the cash flow rights increases, firm value
tends to fall, which is consistent with an entrenchment effect. Their findings support the empirical
prediction by Shleifer and Vishny (1997) who argue that controlling shareholders play a positive role
(incentive effect) only up to a certain point, beyond which their control rights enables them to derive
private benefits which are detrimental to firm value (entrenchment effect).
Faccio and Lang (2002) use the same methodology to examine the ultimate ownership of more
than 5,000 corporations in 13 Western European countries. Two common types of controlling
shareholders characterize the firms in Western Europe: dispersed control and family control. While
firms in the U.K. and Ireland are generally widely-held, other countries (especially in the continental
Europe) exhibit more prominent family control, which are similar to most Asian companies. Besides
pyramids and cross-holdings, Western European companies employ the use of dual class shares (which
are not common in Asia) to gain significant control over the corporations.
6
Mace (1986) and Jensen (1993) support the view that the managers control the outside directors, since the CEOs are likely
to be the ones who select the outside directors.
9
Lins (2003) further explores the relationship between management equity ownership and firm
valuation in the emerging markets. He finds a significant negative relationship between firm value and
management ownership (when there is separation in control and cash flow rights). The relationship
becomes stronger in countries with poor shareholder protection. Large non-management blockholders
play a positive governance role and help to reduce the value discounts associated with the mis-aligned
incentives between managers and shareholders. By restricting their sample to only eight East-Asian
firms, Lemmons and Lins (2003) document that firms earn lower returns during the crisis period when
there is a separation between management control and cash flow ownership through the use of
pyramidal ownership structures. Pyramidal ownership structures (which have been found to be
prevalent in Asian companies) have the potential of encouraging managers to expropriate the minority
shareholders. These findings are consistent with Johnson, Boone, Breach, and Friedman (2000) and
Mitton (2002), who also find that legal environment (such as the degree of shareholder protection) and
firm-specific corporate governance mechanisms have significant effects on the performance of Asian
countries (and firms) during the Asian financial crisis which occurred in 1997-1998.
A series of recent papers by Mak and Li (2001), Wiwattanakanthang (2001), Fishman (2001),
Chen, Fan, and Wong (2002), Yeh (2002), Joh (2003), and Johnson and Mitton (2003) examine the
different aspect of corporate governance mechanisms in individual Asian countries such as Singapore,
Thailand, Indonesia, Taiwan, Korea, and Malaysia.
Mak and Li (2001) find that government ownership is prevalent in Singapore companies
(through the involvement of Temasek Holding). A related study by Mak and Kusnadi (2003)
documents that there exists an inverse relationship between board size and firm value in Malaysia and
Singapore. Wiwattanakanthang (2001) finds that companies with controlling shareholders tend to
perform better than those with no controlling shareholder in Thailand. Her findings suggest that unlike
10
in other Asian countries, controlling shareholders in Thailand do not seem to expropriate the minority
shareholders. One possible explanation is probably because of the less common use of pyramid and
cross-holdings in separating the control rights and cash-flow rights.
Chen, Fan, and Wong (2002) look at the board structure of companies that went public in China
and documents that about one-third of the directors have some affiliations with the government. The
political connection implies that only a handful of directors truly possess the professional
qualifications that are normally required. The boards in China are composed of male-dominated, lowly
educated senior directors. This evidence supports the agency view of government decentralization. The
value of political connections is also found to be important in Indonesia and Malaysia. As documented
by Fishman (2001) and Johnson and Mitton (2003).
Yeh (2002) reports that family controlled firms in Taiwan tend to employ more family
members to the boards as the divergence between control rights and cash-flow rights becomes more
pronounced. Besides, when controlling families increase their cash-flow rights, they will employ less
family directors. He also documents that there exists a significant inverse relationship between
family’s involvement in the board and firm value. His findings are consistent with the negative
entrenchment and positive incentive effects as documented by Claessens et al. (2002).
Joh (2003) explores the relationship between corporate governance and firm performance in
Korea, before the financial crisis occurred in 1997. He finds that firm performance (measured by
profitability) is low when family control is also low. Similar to the previous findings on Asian
companies, firms with high divergence between control rights and cash-flow rights tend to have lower
profitability due to the expropriation by controlling shareholders. Moreover, chaebol firms are also
found to have lower performance, suggesting that the degree of expropriation are more severe for firms
affiliated with business groups.
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2.3 Determinants and implications of cash holdings
Opler et al. (1999) test for two competing theories of cash holdings, which are similar in spirit
to those which have been discussed in the capital structure literature: the trade-off theory and the
financing hierarchy theory.
The trade-off model hypothesizes that there is an optimal level of cash holdings, which is
determined by trading off the costs and benefits of holding cash. There are two costs associated with
holding cash: cost of carry (because cash earns lower return than comparable investments) and agency
costs (because managers have the incentive to invest the excess cash in negative NPV projects). Lang
et al. (1991) find that firms with high cash flows and low q ratios tend to engage in value destroying
acquisitions, which are detrimental to firm value.
The transaction costs motive of holding cash looks into the opportunity costs of cash shortfalls
and predicts that firms hold more cash when they have better investment opportunities and more
volatile cash flows. It also expects a positive relationship between capital expenditures and cash
holdings. Meanwhile, dividend is expected to be inversely related to cash holdings.
The precautionary motive of holding cash considers the impact of asymmetric information on
firm’s ability to raise funds. Firms may choose not to go to the markets to raise capital even when they
have the capacity to do so because of undervaluation problem.
Similar to the pecking order theory of capital structure, the financing hierarchy model argues
that there is no optimal level of cash holdings. Cash holdings are determined by firms’ financing and
investment activities. Essentially, in the financing hierarchy model, we are indifferent between debt
and cash. One important variable that can potentially determine which of the two theories hold is
investment. The trade-off model predicts a positive relationship between investment and cash holdings
while the financing hierarchy view predicts that investment is negatively related to cash holdings.
12
Their findings support the static trade-off model of cash holdings. While growth opportunities
(as measured by market-to-book), investment, R&D expenditures, and volatility of cash flows are
positively related to cash holdings; size and networking capital are negatively related to cash holdings.
They argue that their results are consistent with both the transaction costs and precautionary motives of
cash holdings.
Dittmar et al. (2003) find a significant relationship between investor protection and corporate
cash holdings in a sample of over 10,000 firms from various emerging market. Firms in countries with
poor shareholder protection (poor corporate governance) hold more cash than those in countries with
good shareholder protection. Their findings are robust even after controlling for capital market
development and support the agency-cost explanation of cash holdings.
The agency cost theory suggests that there is a conflict of interests between managers and
shareholders. As a result, managers tend to engage in activities which do not maximize firm value,
such as investing the accumulated cash balance in negative NPV projects or in expensive acquisitions.
On the other hand, putting the excess cash in the bank also does not maximize firm value because of
the low rate of return cash earns. Hence, large cash balance might eventually results in lower firm
performance. In fact, Opler et al. (1999) find that operating losses have the effect of reducing the cash
holdings of firms.
However, a recent paper by Mikkelson and Partch (2003) argue that large cash holdings do not
necessarily imply negative performance. The operating performance of firms with large persistent cash
reserves is comparable to or even better than the performance of firms from matched samples. Since
ownership structures (which proxy for managerial incentive) do not affect cash holdings, their results
are inconsistent with the agency cost explanation. Dittmar et al. (2003) attributes the lack of support
for the agency cost theory to the fact that shareholders in the U.S. enjoy good shareholder protection.
13
3. Sample data
Our sample consists of 230 firms that are listed in the Singapore Stock Exchange (SGX). We
collect financial variables, board structure, ownership concentration, and other relevant variables for
each company for the financial year ending in 1999. The sources for these data are the annual reports
of individual companies and Datastream.
Following previous studies, we have excluded firms operating in the financial industry (banks,
insurance companies, securities companies, etc) from our sample. We have also removed firms with
negative book equity values.
We use the logarithm of the ratio of Cash and Equivalents to Net Assets (assets less cash and
cash equivalents) as our proxy for cash holdings. Other financial variables include: Assets (the book
value of total assets) as a proxy for firm size; Market-to-book (ratio of market value of equity plus
book value of liabilities to total asset) as a proxy for investment opportunities; Leverage (ratio of total
liabilities to total asset); Tangibility (ratio of fixed asset to total asset); ratio of Capital Expenditures
(change in fixed asset plus depreciation) to Net Assets as a proxy for capital spending; and a Dividend
dummy (representing firms that pay dividends).
The board variables are: Board Size; Audit Committee Size; % Executive Directors and NonExecutive Directors in the Board and Audit Committee; Dummy variables (Nomination and
Remuneration) denoting the presence of nomination and remuneration committee in the board. The
ownership variables are: Insider Ownership (percentage of equity ownership7 by the insiders, ie:
executive directors) and Non-Management Blockholder Ownership (percentage of equity ownership by
blockholders who are not insiders, ie: those with more than 5 percent stake).
7
The insider ownership includes both direct and indirect holdings by the executive directors.
14
We have included four other dummy variables: Government (representing the presence of
government ownership), Mainboard (whether the firm is listed on main board), Governance Disclosure
(whether the company disclose a separate report of corporate governance in its annual report), and
Auditor (whether the auditor is a Big 5 accounting firm). Lastly, but not least, we further incorporate
two other firm-specific variables: Age (the number of years since the company is incorporated); and
CTI Score (Corporate Transparency Index score for the firm).
Appendix 1 gives the detailed description of each variable.
[Insert Appendix 1 here]
Table 1 reports the breakdown for the sample companies that are used in the study. Our sample
covers firms in 8 industry sectors in Singapore. The industry sector with the largest number of firms in
our sample is Manufacturing (97 firms) and the majority of the companies are listed on the Mainboard
(almost 80 percent).
[Insert Table 1 here]
The descriptive statistics for the financial, board structure, ownership concentration and other
variables are given in Table 2. We observe that the mean (median) book value of total assets for our
sample is S$730 millions ($169 million). On average, Singapore firm holds about 22 percent of its net
assets as cash, with leverage of 45 percent, fixed asset ratio of 36 percent, market-to-book of 2.03, and
spends about 7 percent of its net assets as capital expenditures. In addition, 82 percent of the firms in
our sample pay out dividends to the shareholders.
For board characteristics, the mean (median) board size and audit committee size for Singapore
firms are 7.3 (7) and 3.2 (3) respectively. The minimum (maximum) number of directors is 4 (14).
15
Executive directors make up about 41 percent of the board and 22 percent of the audit committee. The
average proportion of non-executive directors in both the board and audit committees is about 70
percent and 78 percent respectively.
The insiders (executive directors) in our sample, on average, own 30 percent of the common
stock, with a maximum holding of 93 percent. The non-management blockholders own an average of
32 percent of the common stock. The maximum non-management blockholder ownership is 89
percent. We observe that the insider ownership in our sample is higher than in the U.S.8
The last few statistics reveal that 11 percent of the firms in the Singapore sample are
government linked. The firms in our samples are mostly established firms, with a mean age of about 23
years old. The average CTI score of 37 (out of 100) and the fact that only 68 percent of our sample
firms report their corporate governance practices signal that the level of transparency and disclosure of
Singapore companies is still relatively low.
[Insert Table 2 here]
4. Empirical tests and discussion of results
In this section, we will focus on the empirical tests and discussion of results on the relationship
between corporate cash holdings, board structure and ownership concentration. We will also present
some robustness checks and investigate the effects of adding more control variables or changing our
proxy of cash holdings and our firm specific variables. The dependent variable that we mostly use in
our regression models is our proxy of cash holdings, which is the ratio of Cash and Equivalents to Net
Assets.
8
Agrawal and Knoeber (1996) find that the median insider ownership for a set of Forbes 800 firms in 1987 is 1.7 percent
and 9.6 percent respectively.
16
4.1 Board structure and cash holdings
Table 3 outlines 4 models that we use to explore the relationship between board structure and
cash holdings. Since past studies have shown that a large board tends to be more inefficient, firms with
large boards are implied to have poor corporate governance. Dittmar et al. (2003) document that firms
in countries with poor shareholder protection (which also implies poor governance) hold larger cash
balances. Hence, we hypothesize that there is a positive relationship between board size and cash
holdings.
One of the main objectives of establishing audit committees is to strengthen the ability of the
board in monitoring the performance of managers. Audit committees often require its members to be
non-executive. As a result, we hypothesize that cash holdings and the percentage of non-executive
directors in the audit committee are inversely related.
The function of the nominations committee is primarily to nominate candidates for board
appointments. Other responsibilities may include recommending membership and chairs of board
committees, evaluating board and director performance, and determining the independence of nonexecutive directors. The functions of the remuneration committee generally include recommending a
remuneration framework for the board and recommending remuneration packages for individual
directors and senior executives in the company. Like the audit committee, these two committees are
primarily designed to improve the accountability of the board to shareholders and the monitoring of
management by the board. We hypothesize that the presence of these committees in a firm improves
its corporate governance, which in turn implies a decrease in cash holdings.
In Model (1), we regress our dependent variable (cash holdings) only on the logarithm of board
size, the percentage of non-executive directors in the board, and industry dummies to control for
17
industry effects. Although the sign of the coefficient on the logarithm of board size is positive as we
hypothesize, it is not statistically significant.
We add the audit committee variables and the two dummy variables for nomination and
remuneration committee in Model (2). Again, all the three coefficients on the logarithm of board size
(0.35), the logarithm of audit committee size (-0.37) and the percentage of non-executive directors in
the audit committee (-0.47) are not significant in model without the industry dummies. Similarly, none
of the dummies representing the presence of nomination and remuneration committees is significant.
Next, we examine the impact of adding financial and other firm-specific variables in Model (3)
and (4) to control for firm-specific effects. Prior studies have found that firm size, leverage, tangibility,
market to book, capital expenditures, and dividends are important determinants of corporate cash
holdings. Large cash holdings are associated with small, dividend-paying firms; firms with high
market to book and ratio of capital expenditures to total assets; and low tangible asset ratios.
In Model (3), although the coefficient on the logarithm of board size increases from 0.26 to it is
only marginally significant (with a p-value of 0.07). Similarly, the coefficient on the percentage of
non-executive directors continues to be insignificant.
There is no size effect as documented by Dittmar et al. (2003) since the coefficient on the
logarithm of Assets (which is our proxy for firm size) is not significant. The signs of the other financial
variables are consistent with our predictions and they are highly significant at least at the 1 percent
level. In particular, the coefficient on the market-to-book (0.33) and capital expenditure (1.70) are both
positive. Firms with higher market-to-book (ie: when there is improved investment opportunities) and
capital spending tend to increase their cash holdings, which are consistent with the transactions and
precautionary motives of cash holdings. This finding is similar to that found by Opler et al. (1999) and
Dittmar et al. (2003) and provides evidence that is supportive of the trade-off model of cash holdings.
18
The two other firm-specific variables (logarithm of Age and Mainboard dummy) do not affect cash
holdings.
In Model (4), the coefficient on the logarithm of board size increases in magnitude from 0.40
(in Model (3)) to 0.47. Its significance also improves and it becomes highly significant at the 5 percent
level. As firms increase their board size, they tend to hold more cash. One possible explanation for this
is that as the board size increases, it becomes less effective as monitoring mechanisms, which implies
poor corporate governance. This in turn prevents the shareholders from forcing managers to distribute
excess cash as dividends, and as a result, the cash balances increase.
The coefficient on the percentage of non-executive directors in the audit committee is still
insignificant. We also note that the coefficient of determination has increased from 0.04 in Model (1)
to 0.33 in Model (4), indicating that the firm-specific variables have the effect of better explaining the
relationship between board structure and cash holdings.
[Insert Table 3 here]
4.2 Ownership concentration and cash holdings
After establishing the relationship between the board variables and cash holdings, we will now
turn our attention to the ownership variables and present the results in Table 4. Studies by Morck et al.
(1988), and McConnell and Servaes (1990) uncover a curvilinear relationship between firm value and
insider ownership. We include the insider ownership and its squared term in our regression models to
account for the possibility of a non-linear relationship between cash holdings and insider ownership,
which is what previous studies have documented between firm value and insider ownership.
Lins (2003) argues that non-management blockholders play a positive governance role by
helping to reduce the value discounts when there is a separation in the control and cash flow rights held
19
by a firm’s management group. We define non-management blockholders as those owning 5% or more
of the equity of a firm who are not the managers (insiders) of the firm. We hypothesize that increased
non-management blockholder ownership leads to better corporate governance and hence lower cash
holdings.
Similar to Table (3), we include only the industry dummies in Model (1) and (2) and
incorporate the firm-specific variables as additional control variables in Model (3) and (4). None of the
coefficients on insider ownership (and its squared term) is significant at conventional level in Model
(1) and (2), which is consistent with the findings by Mikkelson and Partch (2003). Meanwhile, the
coefficient on the non-management blockholder ownership (-0.82) is negative as predicted and it is
highly significant (with a p-value of 0.03).9
Adding the firm-specific variables does not alter the significance of the coefficients on insider
ownership in Model (3) and (4). The coefficient on the non-management blockholder ownership (0.82) remains negatively significant, and its significance has improved (with a p-value of 0.01). Hence,
there exists an inverse relationship between non-management blockholder ownership and cash
holdings, which suggests that non-management blockholders act as external monitors and prevent
managers from disgorging excessive cash balance.
The magnitudes of the coefficients on the financial variables are relatively similar to that in
Table 3 and they are still highly significant. We also document that the relationship between firm size
and cash holdings is positive, which is contrary to the negative size effect found by Dittmar et al.
(2003). Similar to Table 3, the R-square has again increased from 0.03 in Model (1) to 0.33 in Model
(4).
9
We have also regressed cash holdings only on blockholder ownership as an alternative specification to Model (2). The
coefficient on the blockholder ownership (-0.81) is negatively significant and it is not different from that obtained in Model
(2). The alternative specification to Model (4) yields similar results.
20
[Insert Table 4 here]
4.3 Robustness tests
In this section, we will combine the results from the previous sections and perform a series of
robustness checks by adding in more control variables or changing our proxy of cash holdings. Table 5
presents the results of our robustness checks. For the sake of brevity, we only report the coefficients on
the board and ownership variables in Table 5.10
The main findings from the previous sections are that board size and non-management
blockholder ownership play important roles in the determination of cash holdings in Singapore firms.
We combine all the board and ownership variables in Model (1) and examine whether the sign and
significance of the two above mentioned variables still remains the same. The coefficient on the
logarithm of board size increases from 0.47 (Table 3, Model (4)) to 0.58, and it remains highly
significant (with a p-value of 0.05). The coefficient on the logarithm of audit committee size (-0.96)
now becomes weakly significant, indicating that as more directors are added into the audit committee,
its monitoring function becomes more effective (probably due to the addition of more non-executive
directors into the audit committee). For the coefficient on the non-management blockholder ownership
(-1.46), it is still negative and significant at the 1 percent level. The magnitude and significance of the
other control variables are stable. Overall, our first robustness test has shown that board structure and
ownership concentration remain influential in determining the level of corporate cash holdings.
In Model (2), we introduce two dummy variables: Large (equals 1 when the board size is larger
than the median value, 0 otherwise) and Large Blockholder (equals 1 when the non-management
blockholder ownership is larger than the median value). We replace the coefficients on the logarithm
10
The complete results are available upon request from the author.
21
of board size and non-management blockholder ownership with the two dummies. The coefficient on
the first dummy (0.38) is positive and significant (with a p-value of 0.02). The economic significance
of the result is substantial. Moving from a small to large board has the effect by increasing the cash
holdings by 37 percent. The coefficient on the logarithm of audit committee size now becomes
negative and significant at the 5 percent level, further confirming the important role of audit committee
in establishing better corporate governance for a firm. Although the coefficient on the second dummy
(-0.26) is negative, it is only significant at the 10 percent level. We have also regressed our dependent
variable only on the two dummies, the industry dummies and the firm-specific control variables, and
obtain similar results (not reported).
Since previous study on Singapore corporate governance has reported that the Singapore
government (through its corporate arm, Temasek Holdings) owns substantial ownership in many large
Singapore companies, we add the Government dummy variable in Model (3).
To help promote corporate transparency and provide investors and other stakeholders with
relevant (and reliable) information in a timely and understandable fashion, The Business Times has
launched a Corporate Transparency Index (CTI) that assesses the level of disclosure in financial results
released by listed companies. The index is a score from 0 to 100, with a passing mark of 50 considered
to be an adequate level of transparency. We further incorporate the CTI score as a control variable in
Model (3). In a way, we can treat a company with a high score on the CTI Index to be better-governed
than a company with a low score. As a result, we predict that a higher CTI score decreases the level of
cash holdings.
Fan and Wong (2003) have shown that auditors also play important governance role in Asian
companies. Hence, we also add the Auditor dummy variable in Model (3). Our board and ownership
22
variables continue to be significant as before (albeit weaker in significance), but none of the three
control variables we introduce are significant. The results in Model (3) suggest that government
ownership, CTI Score and auditors do not affect the level of corporate cash holdings in Singapore.
Recent studies on Asian corporate governance have documented the prevalence of family as the
ultimate controlling owners of Asian corporation, which ultimately leads to the expropriation of
minority shareholders. We examine the effect of family control on the cash holdings by introducing a
family control dummy variable (which equals one if insider ownership is greater than 50 percent) in
Model (4). We hypothesize that firms with family control tend to hold more cash, hence, we expect a
positive relationship between family control and cash holdings. The results show that although the
coefficient on the family control dummy is positive (0.09), it is not significant, while the coefficients
on the logarithm of board size (0.61) and the coefficient on non-management blockholder ownership (1.39) remain highly significance. Hence, our evidence suggests that family control has little effect on
the cash holdings, which is consistent with the findings by Dittmar et al. (2003).
Model (5) is equivalent to Model (1), except that we replace our dependent variable by Cash
and Equivalents / Sales. Dittmar et al. (2003) argue that using sales instead of assets as a deflator is
better because sales tend to be less affected by conservatism. Some of the coefficients (Insider
ownership, its squared term, nomination committee), which do not affect cash holdings previously are
now significant. Governance mechanisms seem to have increasing importance on cash holdings when
we deflate the cash holdings by sales. Hence, the relationship between board structure, ownership
concentration and corporate cash holdings is robust.
[Insert Table 5 here]
23
5. Conclusion
Following Opler et al. (1999) and Dittmar et al. (2003) who have documented the potential
determinants of cash holdings in the U.S. as well as in other emerging markets, it is natural to dig
deeper into the issue and question whether or not firm-specific corporate governance mechanisms
play some roles in the cash balances held by corporations.
Using a sample of 230 firms in Singapore, our findings suggest that board size and nonmanagement blockholder ownership are important determinants of corporate cash holdings. Most of
the firm-specific variables that are used in previous studies also continue to be significant in the
expected manner. In particular, the coefficients on market-to-book and capital spending are positively
significant.
We provide additional evidence of the importance of corporate governance in the determination
corporate cash holdings and the relevance of the agency cost theory, as documented by Dittmar et al.
(2003). Firms with poor corporate governance (large board and small non-management blockholder
ownership) face more severe agency problems and hold higher cash balances.
Although our results are robust to series of additional tests, one of the limitations of this study
is that our sample period is only 1 year. One possible avenue for future research is to test the
relationship using time-series data over a number of years. In April 2001, the Singapore Exchange
(SGX) has started to adopt the Code of Corporate Governance. It consists of four sections on board
matters, remuneration matters, audit and accountability, and communication with shareholders.
Companies are required to describe their corporate governance practices in accordance with the
guidelines that have been set out in the Code. It will be interesting to examine whether the rulings will
improve the quality of corporate disclosure and subsequently mitigate the agency problem shareholders
currently encounter.
24
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27
Appendix 1
Definitions of Variables
Name
Financial variables
Assets
Cash & Equivalents / Net Assets
Leverage
Tangibility
Market to Book
Capital Expenditure / Net Assets
Dividend
Board Structure
Board Size
% Executive Directors
% Non-Executive Directors
Audit Committee Size
% Executive Directors (Audit)
% Non-Executive Directors (Audit)
Nomination Committee
Remuneration Committee
Ownership Concentration
Insider Ownership
Insider Ownership2
Non-Management
Blockholder Ownership
Other variables
Government
Mainboard
Age
CTI Score
Governance Disclosure
Auditor
Description
Book value of total asset (in millions of dollars)
Cash & equivalents divided by total asset
Total liability divided by total asset
Fixed asset divided by total asset
Market value of equity plus book value of liability divided by total asset
Change in fixed asset plus depreciation divided by total asset
Dummy variable – 1 for firms that pay dividends during the financial year,
0 otherwise
Total number of directors in the board
Percentage of executive directors
Percentage of non-executive directors
Total number of directors in the audit committee
Percentage of executive directors in the audit committee
Percentage of non-executive directors in the audit committee
Dummy variable -- 1 if there is a nomination committee, 0 otherwise
Dummy variable -- 1 if there is a remuneration committee, 0 otherwise
Percentage of equity ownership (both direct and indirect) by the insiders
(executive directors)
The square of Insider Ownership
Percentage of equity ownership by non-management blockholders (those
with more than 5 percent ownership)
Dummy variable -- 1 for firms with government ownership, 0 otherwise
Dummy variable -- 1 for firms listed on the main board, 0 otherwise
The number of years since company is incorporated
The Corporate Transparency Index was launched by Business Times in
July 2000 to assess the level of disclosure in financial results released by
Singapore-listed companies
Dummy variable – 1 for firms that provide a separate report of corporate
governance in the annual report, 0 otherwise
Dummy variable – 1 for auditor which is a Big 5 accounting firm, 0
otherwise
28
Table 1
Sample Description
The table presents the breakdown (in terms of mainboard and second board, as well as the different
industries) for the sample of Singapore companies that is used in the study. It consists of 230
companies that are listed in the Singapore Stock Exchange (SGX). The data comes from the
companies' annual reports for the financial year ending in 1999.
Mainboard
Second Board
Industry Breakdown
Commerce
Construction
Hotels/Restaurants
Manufacturing
Multi-Industry
Properties
Services
Transportation/Storage/Communications
TOTAL
29
No of companies
181
49
34
22
11
97
14
21
15
16
230
Table 2
Summary Statistics
The table presents the summary statistics for the financials variables, board structure, ownership
concentration variables, and other variables. Assets is the book value of total assets (in millions of
dollars). Net Assets is calculated as total assets minus cash and equivalents. Leverage is calculated as
total liabilities divided by total assets. Tangibility is calculated as fixed asset divided by total assets.
Capital Expenditures is calculated as the change in fixed asset plus depreciation. Inside Ownership is
the percentage of equity ownership (direct and indirect) held by the executive directors. NonManagement Blockholder Ownership is the percentage of shares held by blockholders (those with
more than 5 percent ownership). For the dummy variables (Dividend, Nomination, Remuneration,
Government, Mainboard, Governance Disclosure, Auditor), the mean represents the proportion of firm
with a value of 1 for the variables. The sample size is 230.
Mean
Financial Variables
Assets
Cash & Equivalents / Net Assets
Leverage
Tangibility
Capital Expenditure / Net Assets
Market to Book
Dividend
Board Structure
Board Size
% Executive Directors
% Non-Executive Directors
Audit Committee Size
% Executive Directors (Audit)
% Non-Executive Directors (Audit)
Nomination
Remuneration
Ownership Concentration
Insider Ownership
Non-Management
Blockholder Ownership
Other variables
Government
Mainboard
Age
CTI Score
Governance Disclosure
Auditor
30
Median
Std Dev
730.48 169.45
22.28% 8.00%
45.47% 46.50%
35.56% 35.00%
6.63% 4.00%
2.03
1.78
0.82
-
2514.86
95.64%
17.92%
22.81%
12.76%
1.08
-
7.27
40.60%
69.40%
3.18
21.75%
78.25%
0.01
0.54
7
40.00%
60.00%
3
33.00%
67.00%
-
2.00
19.92%
19.94%
0.48
15.10%
15.10%
-
29.53% 23.50%
28.79%
32.13% 21.00%
30.28%
0.11
0.79
23.18
36.86
0.68
0.91
21
33
-
17.36
10.44
-
Table 3
Board Structure and Cash Holdings
The table presents the coefficients of OLS regression of cash holdings on board structure variables.
The dependent variable is Cash and Equivalents / Net Assets. All regressions include industry
dummy variables. R-square is the adjusted coefficients of determination. The p-value for each
coefficient is reported in the parenthesis. The sample size is 230. *, **, *** denote statistical
significance at the 10 percent, 5 percent, and 1 percent level respectively.
Log (Board Size)
% Non-Executive Directors
(1)
0.26
(0.28)
0.39
(0.24)
Log (Audit Committee Size)
% Non-Executive Directors (Audit)
Nomination
Remuneration
Log(Assets)
Leverage
Tangibility
Capital Expenditure / Net Assets
Market to Book
Dividend
Mainboard
Log(Age)
Constant
R-square
-0.57
(0.30)
0.04
Cash and Equivalents / Net Assets
(2)
(3)
0.35
0.40*
(0.17)
(0.07)
0.40
(0.17)
-0.37
(0.44)
-0.47
(0.30)
0.04
(0.96)
0.15
(0.27)
0.07
(0.20)
-1.77***
(0.00)
-0.85***
(0.01)
1.70***
(0.00)
0.33***
(0.00)
-0.39***
(0.01)
0.16
(0.27)
0.03
(0.68)
0.18
-1.85*
(0.81)
(0.09)
0.03
0.33
(4)
0.47**
(0.04)
-0.51
(0.21)
-0.35
(0.36)
0.14
(0.82)
0.14
(0.24)
0.09
(0.24)
-1.81***
(0.00)
-0.89***
(0.00)
1.78***
(0.00)
0.32***
(0.00)
-0.40***
(0.01)
0.15
(0.30)
0.05
(0.46)
-1.23
(0.31)
0.33
Table 4
Ownership Concentration and Cash Holdings
The table presents the coefficients of OLS regression of cash holdings on ownership concentration
variables. The dependent variable is Cash and Equivalents / Net Assets. All regressions include
industry dummy variables. R-square is the adjusted coefficients of determination. The p-value for
each coefficient is reported in the parenthesis. The sample size is 230. *, **, *** denote statistical
significance at the 10 percent, 5 percent, and 1 percent level respectively.
Insider Ownership
Insider Ownership2
(1)
-0.22
(0.78)
-0.07
(0.95)
Non-Management Blockholder Ownership
Log (Assets)
Leverage
Tangibility
Capital Expenditure / Net Assets
Market to Book
Dividend
Mainboard
Log (Age)
Constant
R-square
0.24
(0.33)
0.03
32
Cash and Equivalents / Net Assets
(2)
(3)
-0.61
0.05
(0.45)
(0.94)
0.57
-0.38
(0.61)
(0.69)
-0.82**
(0.03)
0.11*
(0.06)
-1.77***
(0.00)
-0.88***
(0.00)
1.76***
(0.00)
0.31***
(0.00)
-0.39***
(0.01)
0.17
(0.27)
0.03
(0.65)
0.78**
-1.44
(0.02)
(0.22)
0.05
0.32
(4)
-0.35
(0.62)
0.29
(0.76)
-0.89***
(0.00)
0.13**
(0.02)
-1.84***
(0.00)
-0.80***
(0.01)
1.67***
(0.00)
0.32***
(0.00)
-0.36***
(0.01)
0.16
(0.29)
0.02
(0.78)
-1.26
(0.27)
0.34
Table 5
Robustness Tests
The table presents the coefficients of OLS regression of cash holdings on board structure and
ownership concentration variables. All regressions include industry dummy variables and control
variables that are used in the previous tables. Panel A report the results when the dependent
variable is Cash & Equivalents / Net Assets; Panel B report the results when the dependent variable
is Cash & Equivalents / Sales. Large is a dummy variable which equals 1 if the board size is larger
than the median value and Large Blockholder is a dummy variable which equals 1 if the nonmanagement blockholder ownership is larger than the median value. R-square is the adjusted
coefficients of determination. The p-value for each coefficient is reported in the parenthesis. The
sample size is 230. *, **, *** denote statistical significance at the 10 percent, 5 percent, and 1 percent
level respectively.
Log (Board Size)
Large
Log (Audit Committee
Size)
% Non-Executive
Directors (Audit)
Nomination
Remuneration
Insider Ownership
Insider Ownership2
Cash and Equivalents / Net Assets
(1)
(2)
(3)
(4)
0.58**
0.60*
0.61**
(0.05)
(0.06)
(0.04)
0.38**
(0.02)
-0.96*
-1.06**
-0.93*
-0.82
-2.63
(0.07)
(0.05)
(0.08)
(0.11)
(0.17)
-0.60
(0.25)
-0.77
(0.29)
0.10
(0.50)
-1.14
(0.22)
1.60
(0.19)
-0.80
(0.12)
-0.17
(0.82)
0.13
(0.28)
-1.17
(0.22)
1.50
(0.23)
-0.62
(0.24)
-0.80
(0.28)
0.10
(0.51)
-1.06
(0.26)
1.53
(0.21)
-0.46
(0.37)
-0.69
(0.34)
0.11
(0.44)
-2.66
(0.16)
-5.51**
(0.04)
0.10
(0.85)
-5.52
(0.11)
7.30*
(0.10)
Family Control
Non-Management
Blockholder Ownership
0.09
(0.58)
-1.46***
(0.00)
Large Blockholder
-1.44***
(0.00)
-0.26*
(0.09)
Government Ownership
Governance Disclosure
Auditor
CTI Score
Constant
R-square
Cash and Equivalents /Sales
(5)
1.99*
(0.07)
-1.35
(0.41)
0.42
-0.01
(0.99)
0.40
-7.53***
(0.00)
-1.39***
(0.00)
-0.02
(0.94)
0.16
(0.28)
0.00
(0.97)
-0.00
(0.99)
-1.43
(0.41)
0.41
33
-1.94
(0.22)
0.42
-5.54
(0.36)
0.45