The Nexus between Corporate Governance, Stock Liquidity, and Corporate Cash Holdings: Evidence from Emerging Economy

Abstract

Corporate cash holdings (CCH) have captivated a lot of research in past years and continue to be eminent in the corporate finance literature. CCH literature identifies three preeminent motives for corporations to hold cash; “transactional, precautionary and speculative motive” (Bates, Kahle, & Stulz, 2009; Opler, Pinkowitz, Stulz, & Williamson, 1999; Ozkan & Ozkan, 2004). This study aims to explore the relationship between stock liquidity (LIQ) and corporate cash holdings (CCH). This study also explores the moderating impact of Corporate Governance (CG) on the relationship between stock liquidity (LIQ) and corporate cash holdings (CCH) in Pakistan. The study uses a generalized least square (GLS) random effects (RE) model to draw inferences from data. The study uses two proxies of liquidity (LIQ), Amihud(2002) illiquidity measure and turnover rate (TR). We use the corporate governance index (CGI), which consists of 3 sub-indices namely, (1) board structure index (BODI), (2) ownership structure index (OWNI), and (3) disclosure structure index (DISCI) as a moderator. The findings of the study reveal that companies with liquid stocks hold less cash after controlling for various firm characteristics. The findings of this study show that the coefficient of Amihd(2002) illiquidity measure is not significant, hence we do not find any relation between Amihud(2002) illiquidity measure and corporate cash holdings (CCH) and (CGI) do not moderate their relationship. We find a negative association between turnover rate (TR) and corporate cash holdings (CCH) and corporate governance index (CGI) moderate their relationship.