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Economics and Business Review, Vol. 8 (22), No. 4, 2022: 39-67 DOI: 10.18559/ebr.2022.4.3 Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 Tahir Akhtar Abstract: This study investigates the role of the country- and firm-level governance practices on the relationship between excess-cash and firm value in ASEAN-5 mar - kets. Using the Generalized Method of Moment models and a sample of 578 firms from 2010 to 2020 the study n fi ds that excess-cash reduces r fi m value, indicating high agency costs and low firm value. However, excess-cash motivated by managerial own - ership, founder CEO, board independence, shareholder rights and creditor rights in- crease firm value while excess-cash due to managerial entrenchment and CEODuality reduce firm value. In the sub-sample analyses the study finds that entrenched manag - ers and board size play a less ee ff ctive role in wasting excess-cash in low-excess-cash r fi ms while independent directors play a higher monitoring role in high-excess-cash r fi ms. In addition, governance at the country-level is more ee ff ctive than at the firm- level in improving the value of excess-cash in large firms. The study oe ff rs unique evi - dence on the relationship between excess-cash and r fi m value by integrating corporate governance practices at the firm- and country-levels. The research aids practitioners, academics, policymakers and investors in developing the best liquidity policies to en- hance business performance. Keywords: excess-cash, corporate governance, firm value, ASEAN. JEL codes: N6, O16, C1, C3. Introduction e d Th ie ff rence in countries’ financial and governance structures ae ff cts the choices of firms’ cash holdings (CH) (Da Cruz, Kimura, H., & Sobreiro, 2019). Financial markets in developing countries have less monitoring to reduce agen- cy costs due to high CH compared to developed countries. The socio-econom - ic characteristics of legal and economic actors are also weak in developing fi - Article received 18 July 2022, accepted 16 September 2022. Department of Economics and Finance, College of Business Administration, University of Ha’il, Saudi Arabia, email@example.com, firstname.lastname@example.org, https://orcid.org/0000- 0003-2067-4021. 40 Economics and Business Review, Vol. 8 (22), No. 4, 2022 nancial markets, increasing the impossibility of transactions (North, 2005) and promoting numerous non-productive activities, including the misuse of cor- porate excess-cash. Thus, firms in developing countries do not participate in the use of liquid assets as ee ff ctively as in advanced countries to create value for investors. Therefore, the potential for private extraction from liquid assets in developing markets is higher and riskier (Acemoglu, Johnson, Robinson, & ai Th charoen, 2003; Akhtar, Tareq, Sakti, & Khan, 2018). Despite the much-an- ticipated agency costs in developing countries only a handful of researchers have turned their attention investigating CH in these markets. e a Th gency theory suggests that internal resources can be misused and waste corporate wealth (Jensen, 1986). As a result increased liquidity may lead to more agency disputes; however strict control of managers through ee ff ctive governance mechanisms could reduce such disputes. Kahan and Rock (2003) argued that corporate governance (CG) aims to secure the interests and rights of shareholders and mitigate the agency problem of excess-cash by optimizing the cash levels or disciplining managers to invest for the benet o fi f sharehold - ers. As a result the CG mechanism can be quite useful in monitoring manage- ment operations especially in firms that operate in developing markets (Alatassi & Letza, 2018). CG includes both country-level (legal/regulatory system and the corpo- rate control market) and the firm-level (share ownership and board of direc - tors (BOD) structure) governance practices. A better combination of govern- ance practices can improve the value of the firm (FV). Yu, Sopranzetti and Lee (2015), Al-Najjar and Clark (2017), Caprio, Giudice and Signori (2019), and Akhtar, Tareq and Rashid (2021a) have revealed that corporate governance mechanisms (firm-level) reduce cash asset expropriations by the manager and therefore preserve the FV. Country-level governance practices in initiating CH and inu fl encing r fi ms’ performance are discussed in cross-sectional studies (see Iskandar-Datta & Jia, 2014; Yung & Nafar, 2014; Seifert & Gonenc, 2016; Kusnadi, 2019; Akhtar, Tareq & Rashid, 2021b). e e Th xisting studies examined the relationship between CG and CH. Yet these studies still lack attention to examining the impact of r fi m-level and country- level governance (collectively) on the association between excess-cash holdings and FV specic fi ally in developing financial markets. The current study aims to investigate the discussed phenomenon in the developing financial markets and chooses ASEAN-5 markets for this purpose due to several reasons. First, the n fi ancial structure and the institutional and legal arrangements of the markets are similar and provide a fertile ground for testing our hypotheses. Second, Lim (2011) argued that ASEAN’s participation in the global investment strategy is important as it is one of the four largest trading regions in the world attract- Due to lack of country-level governance indicators the study includes five ASEAN mar - kets namely, Malaysia, Indonesia, Singapore, Philippine, and Thailand . T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 41 ing investors from all over the world. Third, there is a phenomenal improve - ment in ASEAN’s market capitalization which helps bring these markets to the forefront (Mei-Se, Chien-Chiang, Te-Chung, & Hui-Ting, 2015). These devel - opments have increased the interest of academics and practitioners in these markets. In addition r fi ms in the Asian region prefer liquidity rather than more risky debts (Lee & Lee, 2009) and only a handful of studies have considered ASEAN markets concerning CH. Thus, the study of ASEAN markets makes a valuable contribution to the existing literature. e c Th urrent study contributes to the literature in several ways. First, the study considers management ownership (BOD- and managerial ownership), board ee ff ctiveness (the board size and the number of independent directors) and Chief Executive Oc ffi er (CEO) monitoring (CEODuality leadership, CEO who also heads the BOD and founding CEOs) as firm-level monitors and share - holders-rights (SHR) and the creditors-rights (CR) as country-level monitors. e Th se CG instruments have been well discussed in the literature; however this study is the first attempt to contribute to the literature by creating a multi-factor model incorporating both country- and firm-level CG methods and investi - gating their ee ff cts on the association between excess-cash holdings and FV in ASEAN-5 (developing n fi ancial market). Second, existing studies do not take into account popular theories such as agency (entrenchment) and the interest alignment hypothesis to construct hypotheses in the manufacturing industry nor did the results conr fi m this by conducting robustness tests to make sound liquidity policy recommendations to improve FV. This study develops the hy - potheses related to excess-cash holdings based on the agency and interest align- ment hypothesis and verie fi s them based on sub-sample analyses. Using 578 firms listed on ASEAN-5 stock markets from 2010 to 2020 the study finds that excess-cash has a negative ee ff ct on FV. However, this negative relationship is os ff et by a strong CG mechanism. Excess-cash due to managerial ownership (MGOwn), a higher independent directors proportion and founder CEOs improve FV. e Th se results indicate that shareholders in companies with a high cash surplus are less concerned with internal management because of wasteful projects especially when there is better governance. Therefore, in firms with a strong CG managers’ interests are aligned with shareholders because In the Association of Southeast Asian Nations (ASEAN) context Lee and Lee (2009) have used firm-level governance attributes to check their impact on CH for firms listed on ASEAN-5, during 2001–2005. Kusnadi (2011) has used the data of Singaporean and Malaysian r fi ms. e Th y used the duality of the CEO, the board of directors’ independence, the size of the board and the ownership structure in their study. Wasiuzzaman (2014) has investigated CH’s financial determi - nants for listed firms in Bursa Malaysia. Kusnadi (2003) and Kusnadi (2019) studied Singaporean r fi ms to examine the impact of ownership of non-managerial block-holder on CH and the im - pact of political inu fl ences on the CH value respectively. E-Vahdati, Zulkii a fl nd Zakaria (2018) have considered ASEAN markets to investigate the ee ff ct of board diversic fi ation on corporate performance. 42 Economics and Business Review, Vol. 8 (22), No. 4, 2022 strict supervision over managers makes them more disciplined in investing in the firm’s improvement. However, the study finds that FV declines in firms with more excess-cash and large board sizes as well as a high management ownership level (a proxy for managerial entrenchment (managerial ownership square)). In other words, if firms have more excess-cash shareholders discount FV when implementing weak barriers to control the excessive use of cash through the CG structure. When firms are sorted based on their degree of cash level (low vs high), the study finds that the ee ff cts of managerial entrenchment and board size are more ee ff ctive in firms with high excess-cash levels. When firms are classi - e fi d by total assets (small, medium, and large) the results indicate that excess- cash is insignic fi ant in ae ff cting FV in medium r fi ms while there is a less ee ff c - tive role of excess-cash on FV in large firms due to the firm-level governance. In the rest of the study Section 2 describes the literature review and the de- velopment of hypotheses. e Th methodology is described in Section 3. Section 4 provides results. Section 5 concludes with the policy implications of the findings. 1. Hypotheses development Over the past few years there has been a striking increase in the firm’s CH. Businesses keep cash on hand to save transaction costs and prevent under- investment losses owing to future funding shortages (Kim, Kitsabunnarat- -Chatjuthamard, & Nofsinger, 1998; Opler, Pinkowitz, Stulz, & Williamson, 1999; Wayne & Partch, 2003; Ozkan & Ozkan, 2004). Holding cash enables businesses to invest in successful net present value (NPV) projects and eliminate the need for expensive external funding (Yung & Nafar, 2014). Cash is an investment with a lower rate of return, however (Dittmar, Mahrt-Smith, & Servaes, 2003; Tong, 2010), and businesses with ingrained managers are more likely to hold large amounts of cash rather than paying dividends to shareholders. Large CH may also result in the agency problem of free cash flows if management oversight is insuci ffi ent (Dittmar et al., 2003; Jensen, 1986). One of the main predictions of agency theory is that while robust and ee ff ctive mechanisms of monitoring can prevent managers from wasting corporate resources the availability of firm resources may lead to a discounting of FV. According to Jensen, a cash reserve is the type of asset that poses the greatest threat to the company’s value (1986). i Th s demonstrates that having a lot of cash costs money but ee ff ctive CG can os ff et those costs (Dittmar et al., 2003). By maximizing cash levels or by instilling discipline in managers CG aims to reduce the agency problem associated with free cash o fl ws and encourages them to make investments that will benet s fi hareholders. In this vein research - ers looked into the connections between business value, CH, and governance processes at both the firm- and the country-levels. On the managers’ worries about the size of the cash reserves and the impact of CG in lowering the agen- T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 43 cy cost of large CH, they have discovered coni fl cting findings. Cross-sectional studies on a macro level such as those by Dittmar and others (2003), Kalcheva and Lins (2007), Iskandar-Datta and Jia (2014), Seifert and Gonenc (2016) and Akhtar and others (2021b) discussed an investigation of the financial factors specic t fi o the country that lead to CH. The majority of cross-sectional studies have shown that investors place less value on CH when managers are unchecked by investors or when country-level investor protection is insuci ffi ent. See Chen (2008), Chen and Chuang (2009), Bokpin, Isshaq, Aboagye and Otchere (2011), Boubaker and Nguyen (2015), Podolski, Truong and Veeraraghavan (2016) and Akhtar and others (2021a) discussions on the impact that firm-level govern - ance has on CH. These studies show that firm-level governance measures can successfully prevent managers from misallocating cash assets which helps in- crease firm value. In empirical studies it has been examined how CG ae ff cts CH to increase FV when investors are concerned about the agency problem as was previous- ly discussed. The current research however gave little thought to how surplus cash and business value, as well as country- and firm-level governance relate to one another. As a result both the firm-level governance practices and the country-level governance practices are produced as the sub-hypotheses for the subsequent hypotheses. H : e g Th overnance practices at the firm-level reduce the agency problem of excess-cash for the firms to improve value. H : e g Th overnance practices at the country-level reduce the agency problem of excess-cash for the firms to improve value. 1.1. Firm-level governance practices BODOwnership (BODOwn): Agents are the BOD or other executives in the r fi ms. The current study has considered both BOD- and managerial-ownership. Because BODs can get a wide range of information related to a corporation’s strategic management it is easy to authenticate the correctness of the informa- tion disclosed to the shareholders and monitor decisions. BODs control top management to protect the shareholders’ interests (John & Senbet, 1998) and can ee ff ctively monitor the performance of a r fi m by disciplining the manage - ment and CEO of the firm (Hermalin & Weisbach, 1991). By exercising their responsibilities BODs create value for their shareholders. The BOD can be moti - vated to fulfil their responsibilities by giving them share ownership of the firms. A high percentage of board ownership indicates high oversight by BODs (Yu et al., 2015) and that oversight tends to increase FV by reducing agency prob- lems. Two different schools of thought explain BODOwn monitoring. The first view states that higher internal oversight by the BODs will force managers to withdraw excessive cash which is in line with the assumption of interest align- ment hypothesis. Thus, limiting the access to internal cash reserves which reduces 44 Economics and Business Review, Vol. 8 (22), No. 4, 2022 the agency problems and increases FV. On the other hand, BODOwn leads to more monitoring of the board so that BODs have less fear that their managers will not misuse the higher cash reserves. Due to the strong oversight of BOD there is a better interest alignment between BODOwn and CH. The managers will use the excess cash reserves in the shareholders’ best interest and as a result the FV increases. Therefore, this study can state the first hypothesis as follows: H : Excess-cash generated by BODOwn increases FV. A1 Managerial-Ownership (MGOwn): e p Th rinciple-agent coni fl cts of interest are less likely when managers hold more shares in a r fi m (Chen, 2008). Al-Dhamari and Ismail (2014) documented the role of MGOwn in minimizing agency prob- lems of free-cash-flow. Their results showed that increasing MGOwn increases the revenue estimates. Lee and Lee (2009) reported the positive impact of the excess-cash generated by MGOwn on FV. Yu and others (2015) argued that managers could hoard excess-cash at lower levels of MGOwn because there is less worry that managers will misuse the firm’s cash holdings, which results in higher FV. As in developing financial markets firms are oe ft n forced to seek external financing and should be able to finance their operations using cash in hand. In this way MGOwn helps to reduce agency coni fl cts and maximize FV. Hence the study predicts that: H : Excess-cash generated by MGOwn increases FV. A2 Managerial Ownership Square (MGOwnSQ): The higher liquidity of as - sets gives owners the advantage of controlling managers but at the same time more liquidity gives managers the power to turn assets in their favour (Myers & Rajan, 1998). Earlier studies suggested that a lower managerial share own- ership (MGOwn) level suggests better alignment of interest between manag- ers and shareholders but the ongoing increase in managerial share ownership (MGOwnSQ) will increase management control on liquid assets and thus the entrenchment inu fl ence of managers’ increase (Morck, Shleifer, & Vishny, 1988; McConnell & Servaes, 1990). Managers’ superior control rights encour- age them to use their personal interests at the expense of stockholders (Opler et al., 1999; Boubaker & Nguyen, 2015). Therefore, managers seek to benet fi themselves rather than shareholders. Yu and others (2015) found that when management assets (MGOwnSQ) reach a certain level shareholders do not allow managers to accumulate addi- tional cash. Because the higher managerial share ownership level leads to divert- ing managers’ interests from those of shareholders which may negatively ae ff ct FV. For this reason shareholders make managers spend extra cash to minimize its use in wasteful projects. Thus, the study expects a concave relationship that has diminishing rates of return. Thus, the third hypothesis is: H : Excess-cash generated by the entrenched managers (MGOwnSQ) hurts FV. A3 T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 45 CEODuality: CEODuality occurs when a person serves both as chairman of the board and CEO. CEODuality is detrimental to the firms because such a person is monitoring their actions. Underperforming CEOs who are pursuing their interest in share price cannot be removed by the board which will result in poor performance (White & Ingrassia, 1992). u Th s, r fi ms with dual CEOs are more likely to have agency disputes (Chen, Guedhami, Yang, & Zaynutdinova, 2020). Boubaker and Nguyen (2015) and Chen and others (2020) argued that the splitting role of chairman and CEO is important in reducing agency con- i fl cts. They have further argued that the dual leadership role is thus less ee ff c - tive in controlling managerial entrenched behaviour over the firm’s resources. e Th refore, the potential implication is that by uniting the chair and CEO roles dual CEOs encourage managers to maintain a substantial amount of wasteful capital for their well-being instead of that of the shareholders indicating higher agency costs and lower FV. Thus, the study postulates that: H : Excess-cash motivated by CEODuality reduces FV. A4 Founder CEO: Founders exert greater inu fl ence on business operations and a r fi m’s decision-making. When firms’ founders act as CEOs their inu fl ence in r fi m decision-making increases. Bahrami and Evans (1987) argued that found - ing CEOs focus on the long-term benets o fi f a r fi m rather than on their own in - terests thus reducing agency disputes and indicating higher FV. Founder CEOs improve firm performance by overseeing the firm ee ff ctively (Chen & Chuang, 2009). They tend to be more inu fl ential in business operations and firm deci - sion-making, thus reducing agency problems between principal and agent. He (2008) found higher n fi ancial performance for r fi ms with founder CEOs. e Th y argued that the founder CEO’s interest in the r fi m was due to a strong organi - zational commitment. Lee and Lee (2009) found that excess-cash generated by strong firm-level governance positively ae ff cts FV. Thus, a high founder CEO ratio suggests strong governance monitoring related to the interest-aligned hy- pothesis. Hence the study hypothesizes that: H : Excess-cash generated by founder CEO improves FV. A5 Board Size: John and Senbet (1998) argued that a large board size leads to weak performance in decision-making due to poor communication and the time- consuming performance of directors. As a result strict monitoring of manag- ers is reduced and managers can hold a large sum of cash for their own welfare (Al-Dhamari & Ismail, 2014). Free-riding problems, slower decision-making and coordination problems are the main reasons for such losses (Boubaker & Nguyen, 2015). The organizational inadequacies are considered higher than the wider pool of expertise (Saha & Kabra, 2019). Due to the large size of the board most board members do not cooperate in the improvement of the firm resulting in the problem of free riding. The large size of the board would lead to ineci ffi ent and sluggish decision-making due to the overcrowding of the board 46 Economics and Business Review, Vol. 8 (22), No. 4, 2022 thus reducing the tight hold on managers which enables them to store a large sum of cash (Lee & Lee, 2009; Al-Dhamari & Ismail, 2014). The poor conduct of managers allows them to use cash for their rights at the shareholders’ ex- pense which results in higher CH agency costs thus reducing FVs (Lee & Lee, 2009; Al-Dhamari & Ismail, 2014). Hence the study predicts that: H : Excess-cash generated by board size hurts FV. A6 Independent Directors: An independent board reduces managerial dominance by overseeing opportunistic managers and the board’s ee ff ctiveness plays a role in directing corporate actions (Chahine & Filatotchev, 2008). Independent di- rectors protect and strengthen the protection of minority stockholders who have little control over the firm (Kim et al., 2007). As a result independent di - rectors are most successful in situations that are at higher expropriation risks by outside shareholders (Dahya, Dimitrov, & McConnell, 2008). In this regard board independence and the excess-cash motivated by an independent board can ae ff ct FV in two ways. The first is that of enhancing the degree of informa - tion disclosure to investors and reducing information asymmetry (Chahine & Filatotchev, 2008). Independent directors help firms in reducing managerial expropriation and entrenchment of firm resources thus improving FV (Lee & Lee, 2009). The second relates to the firm’s strong oversight by an independ - ent board that minimizes managers’ personal gains at shareholder cost. In this way board independence provides stronger protection for investors, reduces agency costs associated with higher CHs and improves FVs (Opler et al., 1999). e Th refore, the study predicts that: H : Excess-cash generated by the independent board positively ae ff cts FV. A7 1.2. Country-level governance practices Shareholder Rights (SHR): Shareholder rights include voting power and partic- ipation in employee compensation regarding a r fi m’s financial decisions which helps reduce the agency problem of high CH (World Bank, 2003; Dallas, 2004). e Th se rights help shareholders to obtain information on financial matters from the firm’s oci ffi als such as BODs, analysts and employees which helps reduce in - formation discrepancies between managers and shareholders and as a result FV increases (Asian Development Bank, 1997). Dittmar and others (2003) argued that shareholders set limits on cash at the manager’s discretion when managers have suci ffi ent power to manipulate resources. They further argued that firms operating under weak SHR could not force insiders to withdraw excessive cash balances especially when it was easy to obtain external funds. In this case large cash reserves indicate low investment and high agency costs. Pinkowitz, Stulz and Williamson (2006) found that firms with bad shareholder protection had lower cash values for minority shareholders. Kalcheva and Lins (2007) argued that weak external shareholder protection decreases FV if the firm holds higher T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 47 cash levels. Harford, Mansi and Maxwell (2008) reported that higher acquisi- tions and capital expenditures occur when there is both a weak SHR and ex- cess-cash and that combination results in decreased prot fi ability and lowered FV. Iskandar-Datta and Jia (2014) provided evidence in support of the predic- tion of managerial empire-building and the agency cost explanation that the managers spend excess-cash on value-destroying projects under weak investor protection. Since the majority of the firms in this sample are from countries with insuci ffi ent shareholder protection the agency hypothesis predicts that: H : Excess-cash generated by weak shareholder rights reduces FV. B1 Creditor Rights (CR): The laws of countries that protect creditors in the event of non-payment are known as creditor rights (Kyröläinen, Tan, & Karjalainen, 2013). Yung and Nafar (2014) argued that firms could take legal action in coun - tries with high CRs ranging from managing managers to restructuring and tak- ing control of a r fi m’s assets. However, these moves are not beneci fi al for FV because, under strong CR, managers cannot invest in high-risk projects which increases the cash levels indicating that the FV could be hurt (Chava & Roberts, 2008; Nini, Smith, & Su,fi 2009). Credit covenant breaches increase CEO turn- over (Ozelge & Saunders, 2012). This destabilizes the firm’s internal hierarchy allowing entrenched managers to maximize their cash which in turn hurts FV. e s Th trong CR imposes private charges on managers in the event of a r fi m’s insolvency which increases the turnover of the managers (Acharya, Amihud, & Litov, 2011). The principal-agent conifl cts literature argued that managers might use corporate assets for their private interests due to fear (Bebchuk and Weisbach, 2010). Thus, when managerial private extractions are higher, excess- cash decreases FV (Pinkowitz et al., 2006; Kalcheva & Lins, 2007). Yung and Nafar (2014) have supported these arguments and found that excess-cash encouraged by CR adversely ae ff cts FV. Since the sample firms used here are from countries with strong CR the study expects that strong CR will encourage managers to hold cash to minimize the default risk. Thus, the agency hypothesis predicts that: H : Excess-cash encouraged by strong creditors’ rights hurts FV. B2 2. Sample and methodology 2.1. Sample and data collection e Th study targeted manufacturing firms listed on ASEAN stock markets during 2010–2020 to test the hypotheses empirically. The current study focuses on the manufacturing sector which requires firms to have more cash reserves than any other sector. Nason and Patel (2016) argued that manufacturing r fi ms have less inu fl ence over government regulations than utility and service firm, which could 48 Economics and Business Review, Vol. 8 (22), No. 4, 2022 change the firms’ strategies and are more likely to invest in tangible assets than n fi ancial institutions which can manage cash through investments and loans. Liquid assets are more likely to be exploited in these firms (Chen, 2008). Thus, a study of the manufacturing sector provides a better platform for this study. Initially all manufacturing firms from ten ASEAN markets were targeted. However, due to a lack of data for the country-level governance variables the study is restricted to five ASEAN countries (Indonesia, Malaysia, Singapore, Philippines, and Thailand). Moreover, due to missing annual reports, lack of CG data and unavailability of annual reports in English the n fi al sample was reduced to 578 firms making 6,358 firm-year observations. e c Th ountry-level governance data is compiled from the company law or country commercial code (also available in a study by La Porta, Lopez-de- -Silanes, Shleifer, & Vishny, 1998). e Th n fi ancial data used to calculate the de - pendent and control variables and the data on firm-level governance variables including MGOwn, BODOwn, CEODuality, founder CEO, board independ- ence and board size were extracted from the annual reports. To minimize the impact of outliers financial data is winorized at the 1st and 99th percentiles. 2.2. Empirical model Following previous studies (Lee & Lee, 2009; Dittmar & Mahrt-Smith, 2007) this study has den fi ed excess-cash as the residual cash ae ft r firm operations. Excess- cash can be an indication of a manager’s expropriations of firm assets that are needed for their day-to-day operations. Following earlier studies Equation 1 is used to compute the excess-cash level (Opler et al., 1999; Dittmar et al., 2003; Dittmar & Mahrt-Smith, 2007). The Generalized Method of Moment (GMM) method is applied to Equation 1 and year dummies are included to reduce the ee ff cts of macroeconomic and business cycle aspects. Then by calculating ac - tual and estimated cash die ff rence (i.e. residuals from Equation 1) the excess- cash is calculated: CH = χ+ χ FS + χ CFTA + χ V ol.CFTA + χ NWC + 1 i, t 2 i, t 3 i, t 4 i, t +χ CapExp + χ Div.Dummy + χ Lev + e + Year Dummies (1) 5 i, t 6 i, t 7 i, t i, t In Equation 2 the interactions among excess-cash and governance varia- bles are used to check their relationship with FV. To control the potential en- dogeneity issues the GMM method is used to check the relationship among the variables used in the study. Dittmar and others (2007) argued that finding In the current sample the average SHRI value is 3.41 and the minimum and maximum are 2 and 4, respectively. Statistics show that sample firms have stronger rights on average. The aver - age CRI value is 3.7 with a minimum value of 0 and a maximum value of 4. Although most firms in the sample are from developing economies the countries still have strong shareholder rights and creditor rights. This is because the firms in the sample are from the top ASEAN’s economies. T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 49 an instrument for CG is always challenging and adding CG itself and the in- teractions between excess-cash and CG may eliminate endogeneity issues as excess-cash varies signic fi antly over time than CG. However, the current study uses the estimation of the first die ff rence GMM (Arellano & Bond, 1991) to deal with the possible endogeneity (Megginson, Barkat Ullah, & Wei, 2014). In GMM estimations the current study has treated lagged Tobin’s Q and inde- pendent variables as endogenous and two times lagged is applied (Ozkan & Ozkan, 2004; Chen, 2008). Tobin’s Q = χ + χ CH + χ BODOwn + χ MGOwn + χ MGOwnSQ + 0 1 i, t 2 i, t 3 i, t 4 i, t + χ CEODuality + χ Founder CEO + χ BS + χ BI + 5 i, t 6 it 7 i, t 8 i, t + χ SHRI + χ CRI + χ BODOwn * EXCash + 9 i, t 10 i, t 11 it + χ MGOwn * EXCash + χ MGOwnSQ * EXCash + 12 i, t 13 i,t + χ CEOduality * EXCash + χ FounderCEO * EXCash + 14 i, t 15 i, t + χ BS * EXCash + χ BI * CH + χ SHRI * EXCash + 16 i, t 17 i, t 18 i, t + χ CRI * EXCash + χ Firm Size + χ SalesGrowth + 19 i, t 20 it 21 i, t + χ Leverage + χ NWC + e +Y ear Dummies(2) 22 i, t 23 i, t i, t For FV Tobin’s Q is used a proxy. Cici ft , Tatoglu, Wood, Demirbagc and Zaim (2019) argued that the most reliable fi rm performance measure based on growth potential is Tobin’s Q. Malkiel and Fama (1970) argued that Tobin’s Q can cap- ture the company’s current assets and potential for future growth. Investors’ expectations for future occurrences are also captured by Tobin’s Q which also includes an assessment of existing business plans (Christensen, Kent, & Stewart, 2010; Demsetz & Villalonga, 2001; Ehikioya, 2009; Rodriguez-Fernandez, 2016). e s Th hareholder rights index (SHRI) index is the Anti-director right index developed by La Porta and others (1998) and updated by Djankov, La Porta, Lopez-de-Silanes and Shleifer (2008) and the creditor rights index (CRI) index is developed by La Porta and others (1998) and updated by Djankov, McLeish and Shleifer (2007). The SHRI ranges from 0 to 5 in which the lower values represent that the company’s charters and legal rules treat external sharehold- ers unfairly. When each of the six conditions for rights granted to minority shareholders through the governance mechanism is met the index is increased by 1. The countries with SHRI values equal to 3, 4, or 5 have high shareholder rights groups and the countries with SHRI values equal to 0, 1, or 2 are in the low shareholder rights group. On the other hand CRI varies from 0 to 4, with 0 for weak creditor rights and 4 for strong creditor rights. For the present study SHRI values are available for the years 2003 to 2006, and CRI values are avail- First die ff rence GMM is used because the panel data used has a short time-dimension and a large firm-dimension. 50 Economics and Business Review, Vol. 8 (22), No. 4, 2022 able from 1996 to 2006. Seifert and Gonenc (2016) anticipated that the level of creditors and shareholders did not change over an extended span of time. They added that since the indicators show a little die ff rence over time the integrity of the results is not compromised using the same value. This study followed a similar method in the investigation and took the same values of the indicator for the years ae ft r 2005. The den fi itions of the firm-level governance and control variables used in Equations 1 and 2 are provided in Table A1 in the Appendix. 2.3. Descriptive statistics e v Th alues of Tobin’s Q are almost similar for all countries except for the Philippines as depicted in Table 1. The highest mean cash to total assets (Cash/ TA) value is 17.8% for Singapore followed by Malaysia (12.19%). Indonesia, the Philippines and Thailand all have similar percentages of 10.3%, 11.3%, and 9.8% respectively. Among the country-level governance, the values of SHRI are higher for Malaysia and Singapore while Thailand, the Philippines and Indonesia have lower values. For CRI, Malaysia and Singapore have higher values, whereas the Philippines has the smallest value. Table 1. Mean values of financial and governance variables Philipp- Countries Malaysia Singapore Thailand Indonesia ines Dependent variable Tobin’s Q 1.34 1.26 1.33 1.26 0.996 Moderating variable Cash/TA (%) 0.1219 0.178 0.098 0.103 0 .113 Country-level governance (independent variables) SHR 5 5 4 4 4 CRI 3 3 2 2 1 Firm-level governance (independent variables) BODOwn (%) 8.22 7.89 8.21 2.18 3.95 MGOwn (%) 14.33 14.8 7.43 1.98 0.379 MGOwnSQ 500.37 560.06 230.24 81.85 1.04 CEODuality 0.26 0.473 0.31 0.295 0.57 Founder CEO 0.38 0.425 0.21 0.15 0.19 Board Size (BS) 7.301 6.62 10.23 4.43 10.15 Log (Board Size) 1.95 1.85 2.29 1.42 2.28 Board Independence (BI) (%) 0.43 0.44 0.38 0.37 0.28 Source: Own calculation using Stata 14. T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 51 e Th values of BODOwn are higher for Malaysia and a Th iland at 8.22% and 8.21%, respectively representing a large percentage of share ownership for the board members. Singapore also has a higher mean value of BODOwn (7.89%). Indonesia and the Philippines have mean values of 2.18% and 3.95% representing a lower percentage of BODOwn. Managers in the Malaysian and Singaporean firms represent a huge percentage of shares while the Philippines has the lowest percentage of MGOwn (0.379%). For CEODuality the average values for Malaysia, a Th iland and Indonesia are 0.26, 0.31 and 0.295 represent - ing a low dual CEO position in these firms. Singapore and Thailand on the other hand have a dual leadership structure for most firms as the values are higher for both countries, i.e., 0.473 and 0.57 respectively. In Table 1 Singapore has the highest value for founder CEO (0.425) rep- resenting many founder CEOs followed by Malaysia having a value of 0.38. Indonesian firms have the least mean value of Founder CEO (0.15). Thailand represents a larger board size with an average value of 10.23. Indonesian firms have the least value for board size (4.43). This is because Indonesian firms fol - low a two-tier board system. Singaporean firms have the highest value (0.44) for independent directors while Philippines firms have the least (0.28). 3. Results 3.1. Overall results Equation 2’s findings are shown in columns 1 to 11 of Table 2. GMM estimations are run by using a single interaction term per estimation and the results are re- ported in columns 3 to 11 of Table 2. The study finds a positive and signic fi ant coeci ffi ent on the lagged Tobin’s Q in the majority of the columns indicating that the FV is serially correlated. Thus, GMM estimates provide a purposeful examination of the ee ff cts of the governing mechanism on CH. Excess-cash signic fi antly and negatively ae ff cts FV in columns 1, 2, 5, and 11. These find - ings are consistent with the free-cash-flow agency cost argument that manag - ers waste the firm’s excess resources on non-prot p fi rojects that decrease the FV (Jensen, 1986; Lee & Lee, 2009). Individually BODOwn is positively related to FV in columns 2 and 3. However, the interaction term BODOwn*EXCash is insignic fi ant in Column 3 implying that when there is good monitoring by the BOD the negative impact of the EXCash becomes inee ff ctive which is consistent with the prediction of this paper H . MGOwn is positively related to FV at the 1% signic fi ance level A1 in Column 2. The result is in line with the interest alignment hypothesis which argues that inside ownership improves firm performance when the interest of management and shareholders are aligned by increasing the percentage of share ownership (Al-Dhamari & Ismail, 2014). In Column 4 the individual re- 52 Economics and Business Review, Vol. 8 (22), No. 4, 2022 lationship of EXcash as well as MGOwn with FV is insignic fi ant while the in - teraction term MGOwn*EXCash is signic fi antly positive. The results are con - sistent with the prediction of H . In terms of economic significance the esti - A2 mated coeci ffi ent of 0.039 in Column 4 for the interaction term suggests that an increase in MGOwn by 1% increases an additional dollar’s contribution of excess-cash to the FV by $0.039. e e Th stimated coeci ffi ent on MGOwnSQ (used for managerial entrench - ment) has a signic fi ant and negative relationship with FV in columns 2 and 5 suggesting that the higher the managerial entrenchment the lower the FV. Verifying the statement of Morck and others (1988), the results indicate that higher managerial share ownership concentrates managerial voting rights re- sulting in higher personal welfare over the firm resources. Similar results are obtained for its interaction terms with excess cash as the interaction term MGOwnSQ*EXCash is signic fi ant and negative in Column 5. The results are consistent with the prediction of H . The findings of this study support the ar - A3 gument of Lee and Lee (2009) and Akhtar and others (2021a) that a lower level of managerial ownership (MGOwn) represents well-intentioned behaviour of the managers; however the higher level of managerial ownership (MGOwnSQ) leads to the entrenched behaviour of managers. As a result and due to the pres- ence of entrenched managers the investors discount the value of excess-cash when managers have high managerial share ownership. e CEO Th Duality has insignic fi ant coeci ffi ent values both in columns 2 and 6 indicating the inee ff ctive role of CEO having dual positions. However, the in - teraction term CEODuality*EXCash is signic fi antly and negatively associated with the FV at the 1% signic fi ance level with the coeci ffi ent value of 0.684 in Column 6 implying that an increase in the CEODuality by one level decreas- es an additional dollar’s contribution of excess-cash to FV by $0.684 which is consistent with H . This findings are in contrast with those of Lee and Lee A4 (2009) but are consistent with the argument that the dual CEO’s inu fl ence on the BOD’s decisions results in expropriation by the insiders which is accom- panied by higher agency expenses (Boubaker, 2007; Akhtar et al., 2021a). Thus, the entrenchment effect of CEODuality dominates the incentive alignment ef - fects resulting in a lower FV. e f Th ounder CEO is signic fi antly and positively related to FV in columns 2 and 7. This is in line with Chen and Chuang’s (2009) and Akhtar and others’ (2021a) arguments which supported the interest alignment that larger founder CEO ratios in enterprises lead to lower agency costs and fewer options for mu- tualizing capital for expropriation-related reasons. EXCash is insignic fi ant in in Column 7 however the interaction term Founder CEO*EXCash is signic fi antly positive at the 1% level suggesting an increase in the FV is subject to the con- dition that the CEO should also be the founder of the r fi m. i Th s is in line with the prediction of H which suggests that the founder CEO focuses on the long- A5 term development of the firms resulting in higher FV (Chen & Chuang, 2009).  Table 2. The association among CG, excess-cash holdings and FV Columns 1 2 3 4 5 6 7 8 9 10 11 0.294*** 0.234*** 0.047*** 0.036*** 0.092*** 0.030** 0.049*** 0.006 0.051 0.081 0.084*** L1. Tobin’s Q | (0.120) (0.003) –(0.015) –(0.011) –(0.029) –(0.015) –(0.015) –(0.009) –(0.060) –(0.063) –(0.024) –1.322*** –0.989*** 0.051 –0.132 –0.914* 0.384 –0.054 –0.74 –1.342 –1.313 –4.109*** EXCash (0.009) (0.038) –(0.328) –(0.295) (0.508) –(0.474) –(0.248) –(0.618) –(1.353) –(0.982) –(0.54) 0.003*** 0.002* BODOwn (0.000) (0.001) 0.041*** 0.001 MGOwn (0.000) –(0.001) –0.072*** –0.008* MGOwnSQ (0.000) (0.00) –0.064 0.019 CEODuality (0.004) –(0.013) 0.065*** 0.037*** Founder CEO (0.005) (0.012) –0.069*** 0.098* Board Size (BS) (0.007) –(0.05) 0.057*** 0.245* Board Independence (BI) (0.007) (0.139)  0.031 0.002 SHRI (0.00) (0.00) 0.141 0.004 CRI (0.00) (0.00) 0.013 BODOwn*EXCash –(0.015) 0.039*** MGOwn*EXCash (0.008) –0.001** MGOwnSQ *EXCash (0.00) –0.684** CEODuality *EXCash –(0.311) 0.524*** Founder CEO*EXCash (0.198) 0.214 Board Size*EXCash –(0.363) 4.745* Board Indepen- dence *EXCash –(2.467) 0.427* SHRI*EXCash (0.251) fi ffi ff ffi  1.183*** CRI*EXCash (0.104) 0.014*** 0.029*** 0.043** 0.037* 0.121*** 0.075*** 0.041** 0.048** 0.109** 0.098** 0.063*** Firm Size (0.005) (0.002) (0.021) –(0.02) –(0.037) (0.022) –(0.019) –(0.022) (0.053) (0.041) –(0.024) 0.098*** 0.002*** –0.001*** –0.020** –0.001*** –0.013** –0.000** –0.113** –0.008 –0.008 –0.001*** Sales Growth (0.001) (0.002) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) –(0.007) –(0.007) (0.00) 0.622*** 0.623*** 0.308*** 0.519*** 0.198* 0.435*** 0.383*** 0.553*** 0.305 0.342** 0.137 Net Working Capital (NWC) (0.037) (0.011) (0.085) (0.058) –(0.103) (0.088) –(0.057) –(0.075) (0.177)* –(0.142) –(0.098) 0.132*** 0.007*** 0.024** 0.014 0.02 0.021** 0.021** 0.014 –0.001 0.01 0.013 Leverage (0.002) (0.00) –(0.01) –(0.009) –(0.016) –(0.01) –(0.009) –(0.009) –(0.014) –(0.01) –(0.014) Year Fixed Eects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Sargan test 0.816 0.912 0.274 0.008 0.231 0.151 0.131 0.285 0.674 0.938 0.268 Hansen test 0.177 0.261 0.113 0.191 0.179 0.142 0.064 0.349 0.635 0.166 0.235 AR(2) 0.228 0.958 0.304 0.359 0.569 0.342 0.363 0.234 0.226 0.340 0.489 Note: The regression coecient using GMM is reported in each cell with the standard error in brackets. The signicance level is shown by an asterisk next to each coecient value;* p < 0.1; ** p < 0.05; *** p < 0.01. Sargan, Hansen, and AR(2) tests with higher values support the reliability of the tools employed, the precision of the models and the absence of second-order serial correlation in the models, respectively. Variables operationalization is provided in the Appendix (Table A1). Source: Own calculation using Stata 14. 56 Economics and Business Review, Vol. 8 (22), No. 4, 2022 e i Th ndividual relationship of board size is signic fi ant and negative to FV in Column 2 while signic fi ant and positive to FV in Column 8. On the other hand the coeci ffi ent on the interaction term board size*EXCash is insignifi - cant in Column 8 which is in contrast with Lee and Lee (2009) and the pre- diction of H . The coefficients on independent directors are significantly and A6 positively related to FV in columns 2 and 9 suggesting that shareholders as- sign a higher value to firms with a higher independent directors proportion. e Th se results are consistent with Mehran (1995). The interaction term Board Independence*EXCash is significantly positive in Column 9 indicating that when the board’s independence is high the cash level increases FV which is consistent with Lee and Lee (2009). Thus, the prediction here of H is con- A7 r fi med. In terms of economic signic fi ance evidence from Column 9 shows that the excess-cash increases FV by 28.2% (1.342 : 4.745 = 0.282) when there is one additional independent director. Overall the results show that r fi ms with better board structures have higher FVs which is supported by earlier studies (Gompers, Metrick, & Ishii, 2003; Akhtar et al., 2021a). Regarding the interactions between SHRI and excess-cash and CRI and ex- cess-cash, the coeci ffi ents on SHRI are insignic fi ant in columns 2 and 10; how - ever the interaction term SHRI*EXCash is signic fi antly and positively related to FV in Column 10 which is contrary to the prediction of H and the find - B1 ings of Kalcheva and Lins (2007) and Iskandar-Datta and Jia (2014). The esti - mated coeci ffi ent of 0.427 advocates that an increase in the SHRI by one level increases an additional dollar’s contribution of excess-cash to FV by $0.427. e c Th oeci ffi ents on CRI are insignic fi ant in columns 2 and 11 while the inter - action term CRI*EXCash is signic fi ant and positive in Column 11 indicating that excess-cash motivated by creditors’ rights increases FV which is in con- trast with H and Kalcheva and Lins (2007). B2 Keeping the number of groups higher or equivalent to the instruments is the basic rule in GMM. But due to the small number of markets the high num- ber of instruments results in a weak “Sargan test” in some models as reported in the last second row of Table 2. The over-identic fi ation of Sargan/Hansen test results shows the instruments’ validity as the models have higher p-values (columns 1 to 11) indicating that the study cannot reject instrumental vari- ables’ validity (IVs). However, tests related to the serial correlation show that the error term in various equations is not serially correlated in the modes. The AR (2) test represents a high p-value (columns 1 to 11), indicating the lack of second-order serial correlation in the models. 3.2. Sub-sample results: Sorting firms by cash level and size (total assets) Additional analyses are conducted by sorting firms based on their excess-cash levels (i.e., high and low excess-cash levels) and by total assets (small, medi- T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 57 um, and large sized firms). The majority of the results for die ff rent cash lev - els reported in Panel A and Panel B of Table 3 are quantitatively the same as those in Table 2 with the expected signs with few exceptions. e r Th esults based on GMM estimations show that the interaction terms MGOwnSQ*EXCash and Board Size*EXCash are insignic fi ant in in low excess-CH firms (Panel A). However, the excess-cash motivated by MGOwnSQ (the interaction term MGOwnSQ*EXCash) is negatively associated with the FV in high excess-CH r fi ms (Panel B) with the coeci ffi ent value of 0.004 at a 1% signic fi ance level. Similar results are obtained when excess-cash is motivated by board size (the interaction term Board Size*EXCash) (Panel B). This indicates that when firms have a lower level of excess-cash, there will be fewer agency issues because of less cash availability and vice versa. e Th interaction term Board Independence*EXCash has an insignificant coef - ci fi ent value in Panel A while a signic fi ant and positive coeci ffi ent value in Panel B. This indicates the positive role of independent directors in higher excess-cash r fi ms. The results further show that the excess-cash motivated by CEODuality is negatively related to FV while the excess-cash motivated by MGOwn, founder CEO and CR is positively related to FV both in Panel A and Panel B. Overall the (GMM) results here and based on die ff rent cash levels indicate that the hypotheses H , H , H , H , and H still hold for low-cash level A2 A4 A5 B1 B2 firms while these hypotheses H , H , H , and H do not hold any longer. A1 A3 A6 A7 On the other hand the hypotheses H , H , H , H , H , and H still hold A2 A3 A4 A5 A7 B2 for high-cash level firms while the hypotheses H , H , and H do not hold A1 A6 B1 any longer. These results suggest the importance of dividing firms by the de - gree of their cash levels. Table 3. The association among CG, excess-cash holdings and FV. Sorting firms based on excess-cash holdings Panel A: Firms with Panel B: Firms with Independent variables lower excess–CH higher excess–CH –0.078*** 0.089*** Tobin’s Q (t-1) (0.012) (0.013) –2.393*** –3.529*** EXCash (1.705) (0.828) 0.010*** 0.015*** MGOwn (0.003) (0.003) 0.002** –0.00219*** MGOwnSQ (0.005) (0.000) –0.154*** 0.026 CEODuality (0.027) –(0.029) –0.002 0.002** BODOwn –(0.001) (0.001) 58 Economics and Business Review, Vol. 8 (22), No. 4, 2022 0.095*** –0.060 Founder CEO (0.037) –(0.038) –0.295*** 0.025 Board Size (BS) (0.042) –(0.036) 0.047 0.039 Board Independence (BI) –(0.086) –(0.060) 0.240 0.001 SHRI (0.00) 0.00 0.223 0.021 CRI (0.00) 0.00 –0.016 0.007 BODOwn*EXCash –(0.022) –(0.010) 0.490*** 0.022*** MGOwn*EXCash (0.050) (0.008) 0.008 –0.004*** MGOwnSQ*EXCash –(0.001) (0.001) –3.427*** –0.573*** CEODuality*EXCash (0.451) (0.205) 1.070*** 0.345*** Founder CEO*EXCash (0.481) (0.180) 7.078 –0.067** Board Size*EXCash –(0.750) (0.277) –1.479 1.082*** Board Independence*EXCash –(2.093) (0.372) 1.142*** –0.129 SHRI*EXCash (0.316) –(0.108) 1.100*** 0.854*** CRI*EXCash (0.255) (0.117) Control Variables Yes Yes Sargan Test 0.101 0.153 Hansen Test 0.153 0.145 AR (2) 0.187 0.824 Note: e Th regression coeci ffi ent using GMM is reported in each cell with the standard error in brackets. The signic fi ance level is shown by an asterisk next to each coeci ffi ent value; * p < 0.1; ** p < 0.05; *** p < 0.01. Sargan, Hansen, and AR(2) tests with higher values support the reliability of the tools employed, the precision of the models and the absence of second-order serial correlation in the models, respectively. Variables operationalization is provided in the Appendix (Table A1). Source: Own calculation using Stata 14. T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 59 e s Th tudy performed an additional test using GMM estimations by sort - ing the firms this time in terms of total assets (firm size) by classifying them into small, medium and large . These results are reported in Table 4. For both small and large firms excess-cash negatively ae ff cts the FV while it becomes insignic fi ant for medium-sized firms. Al-Najjar (2015) argued that agency is - sues are severe in large firms however small firms have the market imperfec - tions such as information asymmetry; as a result excess-cash decreases FV. On the other hand medium firms have higher chances of growth; thus these firms’ trade-off costs and benets o fi f excess-cash. The majority of the individual and the interaction variables have shown signic fi ance with the predicted signs in small and medium-sized r fi ms except for the coeci ffi ents on interaction terms SHRI* EXCash” and “CRI*EXCash for small r fi ms and CEO monitoring (the interaction terms CEODuality*EXCash and Founder CEO*EXCash) for medi- um-sized firms which became insignic fi ant. In contradiction to the prediction of this paper the interaction terms BODOwn*EX-Cash, MGOwn*EX-Cash, FounderCEO*EX-Cash, Board Size*EX-Cash and Board Independence*EX- Cash became insignic fi ant for large firms indicating a less ee ff ctive role of ex - cess-cash under strong CG in large firms. The evidence for large firms is con - sistent with Abdullah (2004). Table 4. The association between CG, excess-cash holdings and FV. Sorting firms based on size (total assets) Small Medium Large –0.010 –0.083*** 0.075*** Tobin’s Q (t-1) (0.007) (0.010) (0.014) –0.499*** 0.294 –1.283*** EXCash (0.175) (0.231) (0.255) –0.000 0.003* 0.005*** BODOwn (0.001) (0.001) (0.001) 0.006*** 0.007*** 0.012*** MGOwn (0.002) (0.002) (0.002) –0.000*** –0.000*** 0.000*** MGOwnSQ (0.000) (0.000) (0.000) 0.126*** –0.015 0.016 CEODuality (0.014) (0.021) (0.020) 0.040 0.142*** 0.040 Founder CEO (0.037) (0.039) (0.026) 60 Economics and Business Review, Vol. 8 (22), No. 4, 2022 –0.116*** –0.027 –0.042* Board Size (BS) (0.022) (0.041) (0.023) 0.326*** –0.054 –0.034 Board Independence (BI) (0.040) (0.046) (0.029) 0.000 0.000 0.000 SHRI (0.000) (0.000) (0.000) 0.000 0.000 0.000 CRI (0.000) (0.000) (0.000) 0.016*** 0.012*** 0.004 BODOwn*EXCash (0.002) (0.002) (0.002) 0.017*** 0.015*** 0.022 MGOwn*EXCash (0.006) (0.004) (0.003) –0.000*** –0.000*** –0.000** MGOwnSQ*EXCash (0.000) (0.000) (0.000) –0.073* 0.014 –0.169* CEODuality*EXCash (0.043) (0.057) (0.048) 0.598*** 0.001 –0.019 Founder CEO*EXCash (0.055) (0.053) (0.055) –0.107* –0.003 0.309 Board Size*EXCash (0.057) (0.080) (0.078) 1.515*** 0.705*** 0.164 Board Independence*EXCash (0.131) (0.097) (0.131) –0.028 –0.064* 0.067** SHRI*EXCash (0.027) (0.039) (0.026) –0.022 0.021 0.101*** CRI*EXCash (0.021) (0.024) (0.035) Number of Groups 377 320 325 Observations 1,706 1,592 2,183 F Statistics 1,219.451 32.365 23.393 Hansen test 0.260 0.950 0.401 AR (2) 0.459 0.536 0.190 Note: e Th regression coeci ffi ent using GMM is reported in each cell with the standard error in brackets. The signic fi ance level is shown by an asterisk next to each coeci ffi ent value; * p < 0.1; ** p < 00.05; *** p < 00.01. Hansen and AR(2) tests with higher values support the reliability of the precision of the models and the absence of second-order serial correlation in the models respectively. Variables operationalization is provided in the Appendix (Table A1). Source: Own calculation using Stata 14. T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 61 Overall, our results indicate that the hypotheses H to H still hold for small A1 A7 r fi ms , while the hypotheses H and H do not hold any longer. The hypotheses B1 B2 H , H , H , H , and H still hold for medium firms , while the hypotheses A1 A2 A3 7A B1 H , H , H , and H do not. The hypotheses H , H , H , and H still hold A4 A5 A6 B2 A3 A4 B1 B2 for large firms , while the remaining hypotheses do not hold. These results in - dicate that the role of excess-cash in ae ff cting FV under die ff rent governance mechanisms is sensitive to dividing firms in terms of total assets. Conclusions i Th s study has provided evidence regarding the impact of excess-cash due to country- and firm-level governance on FV in ASEAN-5. The study found a nega - tive impact of excess-cash on FV. The conservative financing policy might be the reason for the negative relationship. Holding higher excess-cash than the opti- mal level encourages management to waste liquid resources in organizational inec ffi iencies. However, strong governance mechanisms discourage managers’ entrenched behaviour by making the best use of corporate liquid resources. e Th study finds that organizational ineci ffi encies can be reduced by giving the share ownership to the inside management, enhancing the founder CEO’s role and maximizing independent directors’ proportion on the board. Consequently, the excess-cash due to these governance attributes improves FV. In contrast, excess-cash due to entrenched managers (proxy by MGOwnSQ) and larger board size negatively ae ff ct FV. This is the indication that these weak govern - ance attributes are involved in organizational ineci ffi encies, thus reducing FV. When firms are classie fi d by their cash level, for the firms with low excess- cash holdings, the study finds a less ee ff ctive role of excess-cash on FV due to entrenched managers. For high excess-cash firms, FV declines due to the avail - ability of more liquid resources the entrenched managers get to misuse firm re - sources. Therefore, firms either should lower the level of excess-cash or should not allow managers to exceed a limited number of shares ownership. In high excess-cash firms, there is a higher role nominated to independent directors to monitor firms’ excess liquid resources; as a result, excess-cash due to inde - pendent directors positively ae ff cts FV. When r fi ms are classie fi d by their size, the study n fi ds that the role of man - agerial and BOD ownership is higher in small and medium firms, but in large r fi ms, the inu fl ence of these variables is lower, which may be due to the pres - ence of a large number of shareholders in those firms. Therefore, the findings suggest that corporate policymakers in small and medium firms may provide a certain percentage of share ownership to the inside management to align managers’ interests with shareholders in order to improve firm performance. Founder CEOs play an ee ff ctive role in small firms. As founders they are passionate about the long-term planning and expansion of firms which is why 62 Economics and Business Review, Vol. 8 (22), No. 4, 2022 they strive to make the best use of corporate resources resulting in increased FVs. However, due to the presence of a large number of other stakeholders in medium and large firms their role in these firms is less ee ff ctive. Thus, in small r fi ms shareholders should maximize the role of the founder CEO to increase firm performance. The role of independent directors is effective in all types of r fi ms but the study has found a lack of evidence regarding the excess-cash mo - tivated by board independence on FV in large firms. This may be due to the presence of few independent directors on the board or because of the man- agement and executive directors’ strong position on the board (Johari, Saleh, Jaafar, & Hassan, 2008). In general firms should employ more independent di - rectors to maximize performance. In large-size firms the study has found a lack of signic fi ant relationship be - tween the excess-cash motivated by firm-level governance variables and FV. However, excess-cash due to country-level governance positively ae ff cts FV in large firms. This finding is interesting because the study has found a limited role of country-level governance in small and medium r fi ms but in large r fi ms country-level governance plays a dominant role. Thus, by improving the SHR and CR the monitoring in large firms can be improved to maximize the effi - cient use of cash and reduce agency costs. However, large firms need to improve their firm-level governance mechanism. e s Th tudy is limited to a few internal governance practices and only two ex - ternal shareholder protection measures. Future researchers can add board di- versity or employees compensation, etc., as internal and majority shareholders or institutional ownership, etc., as external governance provisions. Furthermore, the current study focus only on the manufacturing sector in ASEAN. Future studies can be extended by exploring the collective role of internal and exter- nal governance in private firms and firms from the financial sector in similar markets. Moreover, the future researcher can deepen the findings by compar - ing results in the developing markets having different institutional settings as external monitoring is organically connected to institutional characteristics of the financial markets regardless of whether they are developed or developing. T. Akhtar, Corporate governance, excess-cash and firm value: Evidence from ASEAN-5 63 Appendix Table A1. Data sources and definitions Unit Variables Proxy Calculation Measure- ment (Book value of total assets - the book value Tobin’s Q Tobin’s Q of equity + the market value of equity) / the Ratio (%) book value of the assets Moderating variable. (Source: Annual Reports) Cash to Total Cash/TA cash and cash equavilent / total assets Ratio (%) Assets Independent variables. (Source: Annual Reports) BOD Shares owned by the BOD to the total BODOwn Ratio (%) Ownership shares outstanding Managerial Share percentage owned by corporate ex- MGOwn Ratio (%) Ownership ecutives Setting value 1 if the CEO holds both chair- Dummy vari- CEODuality CEODuality man and CEO positions and 0 otherwise able 0 and 1 Assigned value 1 for founders and 0 oth- Dummy vari- Founder CEO Found-CEO erwise able 0 and 1 Board Size BS e n Th atural log of the BOD Natural Log Board Independent directors to a total directors’ BI Ratio (%) Independence ratio Control Variables. 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Economics and Business Review – de Gruyter
Published: Dec 1, 2022
Keywords: excess-cash; corporate governance; firm value; ASEAN; N6; O16; C1; C3
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