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Corporate Governance and the Value of Excess Cash Holdings of Large European Firms


  • We would like to thank two anonymous referees, Maurits Aben, Ingolf Dittmann, John Doukas (the editor), Abe de Jong, Remco Zwinkels, and participants at the European Financial Management Asscociation 2009 Annual Conference for helpful comments and suggestions. Correspondence: Marc Schauten


We examine the relation between the quality of corporate governance and the value of excess cash for large publicly listed European firms from common-law and civil-law countries. Besides different law origins, we distinguish different dimensions of corporate governance by using ratings for the quality of Shareholder rights, Takeover defences, Disclosure and Board structure. We find that the value of excess cash is positively related to the Takeover defences score only. This finding is mainly driven by firms from common-law countries. If we focus on changes in the level of excess cash, we do find significant effects for civil-law country firms, where the marginal value of €1 of excess cash in a poorly governed firm is only €0.78 while the value is €1.10 for a good governed firm. We furthermore show that the spending of excess cash by poorly governed firms has a negative impact on their operating performance.