Corporate Governance as a Driver of Cash Holdings and the Speed of Adjustment Towards the Optimal Cash Level

The aim of this Master Thesis is to investigate the issue of the role of corporate governance in cash management, particularly in determining cash levels, the deviation from the target cash level, and the speed of adjustment towards the target cash level. This work elaborates on the theoretical framework with regards to different cash holdings motives as well as on the empirical evidence presented by the academic community. The empirical section of the paper examines cash holdings behavior of 285 European companies over the period from 2013 to 2018. It has been demonstrated that generally agency conflicts play an important role determining corporate cash levels and cash management practices. Specifically, the analysis shows that corporate governance is positively associated with cash reserves. However, we also find that corporate governance has an insignificant influence over the deviation from the optimal cash level. In the dynamic estimation of cash holdings behavior we show that the adjustment speed towards the target is higher for well governed firms than for poorly governed ones. Moreover, cash deficit/surplus may partially intensify the impact of corporate governance on the adjustment rate. The results remain robust using diverse measurements of cash reserves.