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The Relation between CEO-Friendly Boards and the Value of Cash Holdings

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  • Hoontaek Seo

    (Holzschuh College of Business Administration, Niagara University, NY 14109, USA)

  • Sangho Yi

    (Sogang Business School, Sogang University, Seoul 04107, Republic of Korea)

  • Qing Yang

    (Holzschuh College of Business Administration, Niagara University, NY 14109, USA)

  • William McCumber

    (College of Business, Lousiana Tech University, Ruston, LA 71272, USA)

Abstract

Our study investigates how CEO-friendly boards influence the value and utilization of cash resources. In this paper, we analyze two conflicting views on CEO-friendly boards and their impact on corporate cash holdings: one view posits that such boards might be too lenient, fostering managerial moral hazard problem, while the other contends that they encourage CEOs to share information, despite CEOs knowing that better-informed boards could enforce stricter oversight. By measuring board friendliness through CEO-board social ties, we find that firms with a friendly board tend to maintain lower cash reserves but their excess cash is valued higher by the market compared to firms without such a board. Moreover, these boards deploy excess cash in ways that significantly enhance firm value. The results remain robust even after controlling for various governance variables and CEO characteristics. Our findings offer crucial insights for corporate practitioners and policymakers, highlighting the importance of appointing and retaining CEO-friendly directors to foster effective information exchange, especially in firms with substantial CEO-board information asymmetry in capital budgeting.

Suggested Citation

  • Hoontaek Seo & Sangho Yi & Qing Yang & William McCumber, 2024. "The Relation between CEO-Friendly Boards and the Value of Cash Holdings," JRFM, MDPI, vol. 17(3), pages 1-19, March.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:3:p:113-:d:1354628
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Khedmati, Mehdi & Sualihu, Mohammed Aminu & Yawson, Alfred, 2020. "CEO-director ties and labor investment efficiency," Journal of Corporate Finance, Elsevier, vol. 65(C).
    5. Schmidt, Breno, 2015. "Costs and benefits of friendly boards during mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 117(2), pages 424-447.
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    Cited by:

    1. Hoontaek Seo & Sangho Yi & William McCumber, 2024. "Friendly Boards and the Cost of Debt," JRFM, MDPI, vol. 17(7), pages 1-17, July.

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