Internal and External Corporate Governance Quality, Information Asymmetry and Cash Holdings:Increase or Decrease in the Firm Value?

Abstract

Objective: Due to the different levels of corporate governance quality in different companies, it is expected that the quality of external and internal corporate governance in different companies will have a different effect on the reduction of agency problems and information asymmetry. This research investigates the role of corporate governance quality on the relationship between cash holdings and firm values when information asymmetry exists. Methods: In this research, the quality of corporate governance has been measured from both internal and external dimensions. Also, to measure information asymmetry, that has a moderator role, three different criteria have been used. The data set includes 106 listed companies of the Tehran stock Exchange within the period 2007 to 2016. Multiple regression models are utilized to test the hypothesis. Results: In the presence of information asymmetry, the higher (lower) quality of corporate governance would have a significant and positive (negative) effect on the relationship between cash holdings and firm values. These results were confirmed not only by considering the separated internal and external dimensions of corporate governance but also by integrating both dimensions. Conclusion: In the presence of information asymmetry, strong corporate governance mechanisms will prevent the agency costs and firm value will increase

Keywords

• Internal and external corporate governance quality
• Information asymmetry
• Agency costs
• Cash Holdings
• Firm value