Financial constraints, corporate governanceand corporate cash holdings: evidence from Thai market

Abstract

The objectives of this paper are to examine the relationship between corporate governance and financial constraints which play a substitution role in mitigating agency conflicts associated to corporate cash holdings of Thai listed company covering the period from 2008 to 2019. I use five firm specific characteristics of financial constraints i.e. annual payout ratio, firm size, leverage ratio, lifecycle ratio as well as collateral asset ratio and corporate governance score as proxies to determine the level of cash holdings. The result provides that financial constrained-firms hold larger amount of cash than financial less constrained-firms in order to have adequate financial cash slack for unanticipated situation. This is consistent with the study of Opler et al. 1999. In addition, an interesting finding is that corporate governance helps financially less-constrained firms to mitigate agency conflicts in corporate cash holdings. This is also consistent with the study of Harford et al. (2008) which suggests that stronger corporate governance will reduce agency conflict because shareholders can ensure that they will be better protected their wealth so they will allow firms to hold larger amount of cash holdings. Therefore, my paper suggests that the effectiveness of corporate governance strongly interrelate with financial constraints on corporate cash holdings in Thailand.