Review of Managerial Science (2021) 15:2193–2238

[Link]

ORIGINAL PAPER

Chief Executive Officers’ monitoring, board effectiveness,

managerial ownership, and cash holdings: evidence
from ASEAN

Tahir Akhtar1 · Mohammad Ali Tareq2 · Kashif Rashid3

Received: 7 October 2019 / Accepted: 6 November 2020 / Published online: 23 November 2020
© Springer-Verlag GmbH Germany, part of Springer Nature 2020

Abstract
This study examines the role of corporate governance mechanisms in the handling of
cash reserves among firms in the ASEAN region. A panel regression was employed
along with the Generalized Method of Moments approach on a sample of 648 listed
firms from the ASEAN markets for 2005–2015. We documented that strong govern-
ance mechanisms, including a lower managerial ownership, a higher proportion of
board independence and founder-Chief Executive Officer (CEO), positively impact
cash holdings (CH), indicating lower agency cost and supporting the interest align-
ment hypothesis. In contrast, higher level of managerial and board ownership, bigger
board and dual leadership structure negatively affect CH, supporting the entrench-
ment hypothesis. The negative effect of managerial entrenchment on CH is miti-
gated with a higher proportion of independent board and founder-CEO. Robustness
tests show that CEO-duality becomes more important while founder-CEO becomes
less important in countries with weak investors’ protection. These findings support
the idea that a strong governance mechanism plays an important disciplinary role to
mitigate the effect of agency conflicts on the cash management policy.

Keywords Corporate governance (CG) · Cash holdings (CH) · Agency theory ·

ASEAN · Manufacturing sector

JEL Classification C3 · D21 · G01 · G30 · G34 · N65 · O16

1 Introduction

The definitions of corporate governance (CG) assert the protection of shareholders

and other stakeholders’ rights by incorporating democratic provisions in the organi-
zations. The government can ensure the shareholders’ friendly organization by an

* Mohammad Ali Tareq

[Link]@[Link]
Extended author information available on the last page of the article

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2194 T. Akhtar et al.

optimal employment of the external and internal corporate governance provisions

leading to a lower agency cost as suggested by Rashid and Islam (2008).
Agency theory suggests that resources available to the insiders can be misused
leading to the wastage of corporate wealth (Hoffmann 2013). This indicates that
higher cash holdings (CH) will result in more agency conflicts because of the non-
alignment of the interest between the principal and the agent. In contrast, the interest
alignment hypothesis suggests that there is a convergence of interest between the
principal and agent because managers own the firms’ shares. Thus, the agency prob-
lems are lower when managers and the shareholders’ interests are matching. How-
ever, higher managerial ownership empowers managers to control the firm’s assets,
which might encourage them to miss-utilize the firm’s assets leading to an increase
in agency conflicts, therefore reducing the firms’ performance. A strong check over
managers by effective governance mechanisms reduces the level of agency conflicts
in the market.
The presence of a CG framework is vital in making the cash holdings deci-
sions pertinent to firms in financial markets. Boubaker et al. (2013), Sheikh and
Khan (2015), Al-Najjar and Clark (2017) and Belkhir et al. (2018) argued that CG
mechanisms can effectively restrain managers’ misallocation of cash reserves and
in turn help preserve the firm value. In particular, the duality of the chief executive
officer (CEO-duality), insider ownership, including managerial and board of direc-
tors’ (BOD) ownership, independent directors, board size and founder-CEO have a
greater influence on the cash liquidity policy.
Lee and Lee (2009) have shown that strong CG associated with higher proportion
of outside directors, separation of CEO and chairman positions, and small board size
lead to convergence of interest between the managers and shareholders. The propen-
sity to hold high cash by an independent board, founder-CEO, higher managerial
ownership indicate lower agency cost of high CH, while bigger board size and CEO-
duality represent poor or weak CG, which may lead to conflicts between managers
and the shareholders. Thus, weak CG indicates higher agency costs associated with
CH.
A remarkable increase in corporate CH around the world had been noticed.
Recently, Al-Najjar and Belghitar (2011) reported 9% of the total assets in cash for
U.K. firms, Bigelli and Sánchez-Vidal (2012) found 10% of total assets in cash for
firms in Italy. Bates et al. (2009) showed 23.2% of total assets in cash for firms in
the U.S. Lee and Lee (2009) have found that CH in the Association of South-East
Asian Nations (ASEAN) markets have increased from 8% in 1996 to 12% in 2005.
Iskandar-Datta and Jia (2014), Seifert and Gonenc (2016), Chen and Yang (2017),
and Mortal et al. (2019) have reported a significant increase in the cash levels for the
firms operating globally. These evidences have shown that cash represents a sizeable
asset for a firm.
ASEAN markets have shown a rapid growth over the last few decades. Mei-Se
et al. (2015) have documented that the market capitalization of ASEAN countries
has increased during the last two decades. They have shown that the market capi-
talization for Indonesia has increased by 4.3 times during 1996–2011, 2.0 times for
the Philippines, 1.3 times for Malaysia, 4.0 times for Singapore and 2.68 times for
Thailand. This increase in the market capitalization showed that both higher capital

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Chief Executive Officers’ monitoring, board effectiveness,… 2195

and the total number of firms listed on the ASEAN markets results in increasing the
size of stock markets. They further added that other factors like deregulation and
financial openness undertaken internally, as well as a high inflow of foreign invest-
ment, helped to create a boom in ASEAN markets. Studies have shown that the
Asian region prefers to hold cash over debt which has increased CH and reduced its
leverage after the Asian financial crisis (Lee and Song 2010).
ASEAN markets is a major manufacturing hub and account for about 5% of
global manufacturing (in value-added terms). In Singapore, the manufacturing sec-
tor accounts for approximately 21% of the economy’s GDP (gross domestic prod-
uct). The manufacturing industry in Malaysia contributes nearly 25% to GDP. For
Thailand, manufacturing sector constituted approximately 33% of GDP, which is
greater than other industrialized economies such as, the U.K., Canada, or the U.S.1
Financial practices of firms, such as CH are affected by institutional factors that
include, cognitive, normative and regulatory structures (Scott 1995). The institu-
tional factors vary between emerging and developed financial markets. According to
North (2005), in developing financial markets, the socio-economic aspects, includ-
ing laws and actors’ approaches are considered to be weak compared to the devel-
oped markets. Da Cruz et al. (2019) have also highlighted the need for CH investiga-
tion in emerging markets as these markets differ in their governance and financial
structures, which might affect the firms’ CH differently.
ASEAN markets mainly have the characteristics of developing markets and these
markets normally employ less developed financial instruments to manage/negoti-
ate the risk prevalent in their systems (Hunt and Terry 2011). These markets have
block holdings, weak regulatory authorities, few dominant families as administra-
tors of firms, weak presence of market forces, and pyramidal and crossed sharehold-
ings (Wei 2003). These features in the market lead to a higher potential agency cost
among the contracts of these firms (Booth et al. 2001; Al-Najjar 2011).
According to Nason and Patel (2016), there is less influence of government regu-
lations on manufacturing firms compared to utilities and service firms, which might
change firms’ strategic actions. Manufacturing firms have a lower impact of govern-
ment bailouts that could affect the willingness of hoarding cash and credit avail-
ability, as compared to service firms. They argued that manufacturing firms invest
more in tangible assets compared to financial bodies that can quickly organize cash
through investments and loans.
Summary of the recent literature pertinent to the area under study and their find-
ings are presented as follows.
Kusnadi (2003) proved that board size is positively and non-management block-
holders’ ownership is negatively related to the level of CH. Gill and Biger (2013)
suggested that CG instruments play a partial role in making working capital effi-
cient. Boubaker et al. (2013) showed that independent directors and non-dual lead-
ership structure reduce the agency cost of CH. Wasiuzzaman (2014) proved the
relevance of pecking order, trade-off and agency theory in explaining the level of

1
These statistics are taken from ASEAN’s Leading Manufacturing Destinations displayed on August 5,
2014, by ASEAN and presented by Zito (2014).

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2196 T. Akhtar et al.

CH. Seo et al. (2014) suggested that board independence improves the value of CH.
Kusnadi et al. (2014) asserted that firms operating in less developed institutional
environments hold a lower level of cash. Liu et al. (2015) showed that family firms
with excess control rights hold higher cash and were involved in extracting private
benefits.
Mohd et al. (2015) found that higher debt to equity ratio and government linked
institutions reduce the level of CH in the firm. Mun and Jang (2015) found an inter-
action among working capital, CH level and profitability. Yu et al. (2015) proved
that a higher level of managerial ownership leads to the conflict of interest between
the shareholders and managers and CG instruments play an important role in con-
trolling the misappropriation of managers. Ramly et al. (2017) proved that women
director as an independent director improves banks’ efficiency in ASEAN-5.
Acero and Alcalde (2016) reported that an increase in type I agency problem
leads to a higher level of outsider directors on board. On the contrary, a higher
level of type II agency problem leads to more percentage of independent directors
in the firms. Xu et al. (2016) proved that the firm holds less cash during the first
year of newly appointed government officials. Nason and Patel (2016) found that
manufacturing firms make a higher level of investment in tangible assets. Abdioglu
(2016) suggested a non-monotonic relationship between managerial ownership and
the level of CH. Khattak et al. (2017) found a negative impact of CG provisions
in affecting the level of CH. Gu (2017) suggested that firms that make investment
overseas have different ex-ante cash policies from other firms. Devos and Rahman
(2018) found a positive relationship between the level of CH and unemployment
risk. Belkhir et al. (2018) showed a reduction in the value of CH when the level of
CEOs’ insider debt increases.
Chen et al. (2018) proved that state ownership is positively related to the level of
CH. E-Vahdati et al. (2018) found that nationality and gender diversity have media-
tion effects in ASEAN countries. Achleitner et al. (2018) proved that the equity mar-
ket shows a positive reaction following the announcement by foundation when it
makes an attempt to reduce the level of ownership. Caprio et al. (2019) proved that a
family firm holds more cash than other firms. Kusnadi (2019) asserted that political
connections do not have any link with the value of CH. Mortal et al. (2019) asserted
that European private firms hold less cash than public firms. Pucheta-Martínez
and Gallego-Alvarez (2019) showed that some board characteristics are positively
related to the firm performance.
Most of these have investigated the effect of CG on CH. However, these stud-
ies lack in considering the impact of managerial ownership, independent directors,
founder-CEO, the board of directors’ ownership, CEO duality, and board size in
affecting the CH, particularly in ASEAN (developing financial markets). Further-
more, these researchers have not considered the manufacturing sector by develop-
ing their hypotheses based on the famous theories (interest alignment, entrench-
ment, managerial power and monitoring hypotheses), and did not perform additional
robustness tests to provide valid policy recommendations.
This study bridges the above-mentioned gap by considering a sample of 648
listed manufacturing firms from ASEAN markets making 7128 firm-year observa-
tions during 2005–2015. CG attributes that mitigate agency costs, such as lower

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level of managerial ownership, founder-CEO, and independent directors are found to

be related to higher cash levels, indicating lower agency cost, supporting the interest
alignment hypothesis in ASEAN markets. However, the adoption of CEO-duality,
bigger board as well as a higher level of managerial ownership are associated with
lower levels of cash and lead to exacerbating the agency cost of CH.
We also find that strong CG mitigates the negative impact of managerial entrench-
ment on CH. This signifies that board monitoring is effective, specifically, when the
chances of expropriation are higher, particularly, in firms with more likely manage-
rial entrenchment, those with a greater percentage of founder-CEOs and independ-
ent BOD, non-dual CEO’s and smaller sized boards, have higher cash reserves.
Thus, firms with strong CG mechanisms support the interest-aligned behaviours of
managers as strong monitoring over managers makes them disciplined to invest in
the betterment of the firm. The purpose of higher CH in firms with strong monitor-
ing is to lower the transaction costs and cost of financial distress and helps firms
to meet precautionary motives. A possible description is that management cannot
exploit the firms’ liquid assets that have a strong CG mechanism.
The literature review and hypotheses development are discussed in Sect. 2, fol-
lowed by the methodology in Sect. 3. The results are discussed in Sect. 4 while in
Sect. 5 the study is concluded.

2 Literature review and hypothesis development

Keynes (1936) initiated the CH debate. He argued that firms hold cash to reduce
transaction costs, to avoid the assets’ liquidation, as reserve cash is available to make
future payment and to reduce the loss of under-investment due to scarce resources.
These motives helped researchers to develop two models that have major contribu-
tions towards the CH determinants: the trade-off model and financing hierarchy the-
ory (Opler et al. 1999; Mikkelson and Partch 2003; Haushaltera et al. 2007; Akhtar
et al. 2018; Mortal et al. 2019). The trade-off model, developed by Miller and Orr
(1966), optimizes cash levels by matching the expenses of holding non-interest bear-
ing cash and costs of running out of cash. In contrast, Myers and Majluf (1984)’s
financing hierarchy theory, which suggests that firms do not have an optimal level
of cash, instead, to reduce the cost associated with the information asymmetry, firms
follow a pecking order of financing.
Besides these two theories, researchers have identified a darker side that firms
hold cash because of managerial preferences when managers act for their own per-
sonal interests instead of shareholders. This gives rise to agency conflict, which was
first documented by Jensen (1986). Agency theory was extensively argued in the
CH literature (Kalcheva and Lins 2007; Belkhir et al. 2018; Kusnadi 2019). The
agency conflicts of high CH can be reduced by aligning the interest of managers
with shareholders.
Pant and Pattanayak (2007) argued that when insiders’ share participation is very
low, the impact of the entrenched managers is minimized due to the lack of control
over the decision-making process in the company. However, once they gain domi-
nance in the company, they exercise their authority to pursue non-profitable value

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diminishing activities. The addition of equity ownership of the manager can increase
the entrenchment effect and reduce the financial performance. This dominance may
affect the average level of CH, which in turn lowers the value of a firm. Thus, the
interest alignment hypothesis suggests that with the help of effective monitoring
structure through strong governance mechanisms, managerial discretion over cash
levels can be reduced (Yu-Thompson et al. 2016).
The firms in Indonesia, Thailand, the Philippines, and Malaysia suffered extreme
economic shocks during the 1997–1998 Asian economic crisis due to weak CG
mechanisms in them (D’Cruz 1999; Khas 2002; Mohammed et al. 2006). Haat et al.
(2008) reported that the 1997–1998 financial crises as well as the accounting scan-
dal in the U.S. were a wake-up call to improve CG as well as transparency among
the ASEAN firms. As a result, CG becomes a vital component for firms in ASEAN
markets after the 1997 financial crisis (Nor et al. 2014). The poor governance struc-
ture was the reason behind the collapse of the Perwaja Steel, Renong and Malay-
sia Airlines System and also led to the collapse of several Malaysian firms listed
on Bursa Malaysia (Haat et al. 2008). Thus, an effective governance mechanism is
essential to mitigate these severe agency problems and to align the interest between
managers and shareholders in the ASEAN region.
Lau and Block (2012) investigated the role of powerful founders and families in
affecting the level of CH and firm value for a sample from Standard and Poor’s (S
and P) 500 published in Business Week in July 2003 and found a lower level of
agency cost among founder firms compared to the family firms. The founder firms
were found to have a higher level of CH compared to the firms owned by families.
Boubaker et al. (2013) examined the role of board of directors of 597 French firms
from 2001 to 2007 and argued on the preference for independent directors and non-
dual leadership structure in reducing the agency cost of CH. Seo et al. (2014) tested
the role of the board independence in affecting the corporate CH in the U.S. firms
and found that the presence of independent directors on the board improved the CH,
which resulted in a higher value of cash available to shareholders.
Mohd et al. (2015) analyzed the role of institutional ownership and CH in non-
family and publicly listed firms on Bursa Malaysia’s main market employing 2022
observations for 2008–2010. Their results suggested an influence of managerial
ownership and CEO duality on a higher level of CH. Leverage and government-
linked companies can play an important role in reducing the level of CH in firms.
They recommended that the manager’s ownership level should be reduced as well
as the non-dual leadership structure should be dismantled to safeguard the share-
holders’ rights in the market. Sheikh and Khan (2015) investigated the impact
of board attributes and insider ownership on CH among Pakistani firms. They
used a sample of non-financial firms listed on the Karachi Stock Exchange during
2008–2012 and endorsed a positive relationship between independent directors
and CH. They also found a negative relationship of insider ownership with CH.
Boubaker et al. (2015) tested the nexus between geographic location, excess
control rights and the level of CH. They found a positive relationship between
distance to the metropolitan area and the level of CH, especially when block
holder has a higher level of separation of cash flow and control rights.

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Chief Executive Officers’ monitoring, board effectiveness,… 2199

Liu et al. (2015) investigated the role of family control on the CH policy in
Chinese firms. They found a positive relationship between control rights and CH,
implying that majority shareholders are involved in extracting private benefits at
the cost of shareholders. Similarly, Kusnadi et al. (2014) also tested the role of
institutional development and the level of state ownership affecting CH in Chi-
nese firms. They suggested that higher institutional development leads to intense
CH and this phenomenon is more observed among firms, which are not controlled
by the state. Mun and Jang (2015) tested the role of working capital and CH in
affecting the performance of firms. The results of their study suggested a non-
linear relationship between working capital and profitability of selected firms and
that, this relationship is moderated by the level of CH.
Yu-Thompson et al. (2016) have compared the CH between family and non-
family firms. By studying S and P 500 firms, they have concluded that family
firms are less aggressive in holding liquid assets to avoid under-investment. They
have supported the interest alignment hypothesis and argued that shareholders
can implement effective monitoring in family firms, resulting in a higher level of
corporate liquidity.
Xu et al. (2016) tested the relationship between the level of CH and politi-
cal upsets in Chinese firms. They found that CH behaviour of corporation is
adversely affected by political uncertainty. This political upset is caused by the
turnover of government official.
Abdioglu (2016) conducted an analysis on the role of managerial ownership
in affecting the level of CH among the listed firms on the Borsa Istanbul 100
index for the period 2005–2013 and found a non-monotonic relationship between
managerial ownership and the level of CH. Firms with managerial ownership
showed an inclination to hold less cash. Managers were found to be involved in
the exploitation of the shareholders when they had a higher level of shareholdings
among these firms.
Gu (2017) performed a study on the U.S. multinationals and CH by using a
dynamic model. The variables under study were corporate physical and intangible
investments, cross border decisions and financial policies. The results suggested a
reduction of cash differentials by 42% if repatriation costs were equalized to zero.
Kengatharan (2017) tested the relationship of CG provisions with the level of CH
on listed companies of Sri Lanka for the years 2011–2015. His results suggested
that CEO-duality and leverage negatively affect the level of CH. On the other hand,
an audit committee meetings and firm size were found to be positively affecting
the level of CH. Khattak et al. (2017) studied companies listed at Karachi Stock
Exchange, Pakistan and endorsed a negative impact of CG provisions (board size,
CEO duality and board independence) on CH of firms.
Devos and Rahman (2018) tested the relationship between labour unemployment
and the level of CH in U.S. firms. They hypothesized a positive relationship between
the level of CH and risk of unemployment but instead found an inverse relation-
ship between these variables. Belkhir et al. (2018) examined the role of CEO’s
inside debt and the value of excess cash by using a sample of 876 U.S. firms for
2006–2013. They found that the value of extra cash available to the shareholders
reduces as the level of CEO inside debt increases.

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2200 T. Akhtar et al.

Chen et al. (2018) analyzed the effect of state ownership in affecting the level
of corporate CH. They used the sample of privatized firms from 59 countries and
found a positive relationship between state ownership and the level of CH by the
corporation.
Mortal et al. (2019) considered the firms from European countries to understand
the reasons behind the differences in CH between private and public firms, and
found that private firms hold less cash compared to the public firms. This difference
is mostly related to the varying borrowing costs in different countries. Caprio et al.
(2019) investigated CH and heir CEO and family firms and found that family firms
hold more cash compared to the other firms. The average difference was found to be
2.3% of total assets. In addition, the role of CEO was found to be more destructive
as the incremental value of an additional Euro suffers from a 38.3% discount on an
average as compared to non-family firms.
In the ASEAN context, Wasiuzzaman (2014) studied the firms listed on Bursa
Malaysia and found important financial determinants that effect the choices of CH.
Kusnadi (2003) and Kusnadi (2019) examined the relationship between non-man-
agement block-holder ownership and CH, and between political connections and CH
value, respectively. E-Vahdati et al. (2018) analyzed the association between gender
and nationality diversity with the firm performance, with a special emphasis on the
mediating role of corporate social responsibility reporting (CSRR). Using a sample
consisted of 264 firms from all the industries, and employing sustainability report-
ing guidelines from 2011 to 2013, they have also tested the moderated mediating
role of ASEAN countries by considering legitimacy and institutional theories. The
results of their study proved that both nationality and gender diversity have partial
and full mediation effects in ASEAN countries. The results further suggested that
the effects of board diversity are direct with corporate performance and indirect with
CSRR through moderated path analyses.
Studies were limited in performing their analysis of CG instruments in ASEAN
markets by using advanced econometric methods as well as failed to integrate nota-
ble theories in their results. This study, therefore, develops the following subsequent
hypotheses to investigate how these CG attributes can play an important role in miti-
gating the agency problem of CH among the firms in the ASEAN region.
Managerial ownership in ASEAN countries can reduce the agency cost of free
cash flow and protect the rights of the shareholders in these markets but a higher
level of shareholding might provide them with excessive power and potential to
drive private benefits. Besides, dual leadership structure is detrimental to sharehold-
ers’ rights due to the autocratic role of a single person dominating both positions
and impairing the board’s ability to control the accumulation of the free cash flow in
the firms in the ASEAN countries.
On the other hand, founder-CEO is expected to add value in the organizations
as these CEOs are more seasoned in handling the affairs and reducing conflicts
of interests related to the CH in firms in the ASEAN region. Similarly, a higher
number of independent directors serving on the board can also make the firms
democratic by monitoring the level of cash flow in a firm. In addition, a big-
ger board in the ASEAN is expected to be involved in free riding and passive

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monitoring. This will lead to a lower level of cash accumulation among the firms
in the ASEAN region.

2.1 Managerial ownership and CH

Managerial ownership (MG-Own) shows the level of interest alignment between

principal and agent, and its consequences are commonly examined in the agency
and governance literature (Chen 2008; Drees et al. 2013). The MG-Own plays
an important role in devising corporate liquidity policy by aligning the interest
of the investors with inside management. The level of conflicts are less likely
to occur between the principal (shareholders) and the agent (managers) when
managers own more shares of the firm, thus predicting a positive association
between MG-Own and CH (Chen, 2008). By owning the firms’ shares, managers
will think for higher firm performance and will try to increase the profitability
as the manager’s stakes are in line with those of shareholders. Chen and Chuang
(2009) and Yu et al. (2015) studied the relationship between MG-Own and the
firm’s CH and found that the greater percentages of MG-Own are related to the
higher levels of corporate CH. Based on the interest alignment argument, our
first hypothesis is:

H1 There is a positive relationship between managerial ownership and CH.

In contrast, Morck et al. (1988) and McConnell and Servaes (1990) have
argued that a higher level of MG-Own leads to intense managerial control over
the liquid assets as well as the entrenchment effect of managers. Higher manage-
rial control rights encourage managers to accrue their own private benefits at the
cost of shareholders (Opler et al. 1999; Boubaker et al. 2013). Yu et al. (2015)
argued that a higher MG-Own level leads to a divergence of managerial interests
from the shareholders. As a result, shareholders enforce managers to expel cash
reserves, so that it cannot be wasted or invested in loss-making ways. Therefore,
we expect a concave relationship between MG-Own and CH that has diminish-
ing rates of return. We conclude that at a lower level of MG-Own, managers try
to benefit shareholders, and this results in a positive effect on CH. Alternatively,
the higher MG-Own level [which is measured through the managerial-ownership
square (MG-Own-SQ)] may affect the CH negatively. Based on the managerial
power argument, our second hypothesis is:

H2 There is a negative relationship between MG-Own-SQ and CH in ASEAN.

2.2 Board of directors’ ownership (BOD‑own) and cash holdings

This study also tries to find the relationship between internal monitoring by BOD
and firm’s CH. The higher percentage of BOD-Own indicates higher internal moni-
toring. Yu et al. (2015) have asserted that the relationship between BOD-Own and

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2202 T. Akhtar et al.

cash holdings can either be positive or negative. BOD-Own leads to higher board
monitoring implying that shareholders permit managers to hold higher cash because
they feel less fear from managers misusing it. Thus, the cash can be safely hoarded.
On the other hand, higher internal ownership implies that BOD will force cor-
porate insiders to expel surplus cash (which may increase the misuse of the cash)
resulting in lower levels of cash. Harford et al. (2008) have argued that weakly con-
trolled managers try to spend cash on acquisitions and capital expenditures rather
than hoarding extra cash. Thus, following this argument, we expect that higher
BOD-Own may provide board members with a higher level of entrenchment in deal-
ing with the liquid reserves. As a result, their value-creating behaviour is adversely
affected and the misuse of cash in these firms increases, leading to more agency
cost. Based on the agency perspective in ASEAN firms, our third hypothesis is:

H3 The relationship between the board of directors’ ownership and CH is negative

in the ASEAN region.

2.3 CEO‑duality and cash holdings

The leadership structure (CEO and the chairman of the BOD) can assess the qual-
ity of board monitoring (Brickley et al. 1997). The agency perspective suggests that
splitting the two roles is a major determinant of a board’s effectiveness and inde-
pendence that can restrain the board members to perform their fiduciaries (Jensen
1986; Amaral-Baptista et al. 2011). This view advocates that CEOs, who also chair
the BOD, harm the ability of the board to monitor entrenched managers as the com-
bination of both roles is inclined to dominate the board (Daily and Dalton 1997;
Wang 2016). CEOs tend to hold vital information that is required to appropriately
assess the quality of the firm management, and thus, strengthening the CEO’s dis-
cretionary power particularly those who also assist the firm as a chairman of the
BOD (Brockmann et al. 2004). This leads to limiting the scope of the board’s moni-
toring because of CEO-duality and results in un-detecting managerial opportunism
(Goyal and Park 2002; Lipton and Lorsch 1992). Thus, the board led by dual CEOs
would be less effective in restraining managerial opportunism over the firm’s assets
such as cash.
CEO-duality is harmful to the firm as a single individual is monitoring his own
actions (Amaral-Baptista et al. 2011). Boubaker et al. (2013) have reported that a
higher cash level depends on the degree of BOD effectiveness. They have found
that the division of CEO and chairman is vital in mitigating the agency problem
and asserted that dual leadership has a less effective role in monitoring managers
who are controlling the cash in a firm. Therefore, the possible implication is that
by uniting the CEO and the chairman functions, the dual-CEO encourages the
managers to dissipate substantial amounts of idle cash reserves for their own wel-
fare at the cost of shareholders, indicating higher agency cost.
The entrenchment hypothesis suggests that managers in firms prefer to spend
cash (Jensen and Meckling 1976). These entrenched managers quickly utilize the

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Chief Executive Officers’ monitoring, board effectiveness,… 2203

cash making overinvestment and restraining firms’ future ability to invest the cash
in profitable opportunities (Harford et al. 2008; Kuan et al. 2011). As the sample
firms in the current study are based on concentrated control structures, the dissi-
pation of cash reserves should increase the controlling shareholders’ ability to get
more personal benefits from the firm’s wealth at the cost of minority sharehold-
ers. Thus based on the entrenchment hypothesis, our fourth hypothesis is:

H4 There is a negative relationship between CEO-Duality and CH among firms in

ASEAN countries.

2.4 Founder‑CEO’s and cash holdings

The role of CEO is important in determining corporate cash policies, as discussed

in the earlier sections. The influence of CEOs in the decision-making process
increases when founders of the firms act as CEOs. In smaller firms, the impact of
founders, directors, and managers is high because firms with a smaller size have
comparatively less complex governance mechanisms (Cowing 2003). Investigat-
ing the special characteristics of the firms, Bahrami and Evans (1987) and Was-
serman (2003) have reported that the founder-CEO focusses on the firms long
term benefits instead of spending on luxurious perquisites. They further added
that the founder-CEO does effective monitoring and always takes decisions in the
best interest of the firms rather than extracting private benefits, thus reducing the
agency conflicts in these firms.
Block (2012) argued that investment in research and development (R and D)
and the adoption of new technology leads to innovation and higher performance
considering the uncertainty attached to the investment. The presence of uncer-
tainty may cause the agency problems that make investment in R and D undesir-
able for shareholders. Block (2012) concluded that by improving the R and D
intensity as well as its productivity, founders can reduce the shareholders’ con-
cerns by controlling the agency issues. Chen and Chuang (2009) investigated a
sample of technological firms listed on the National Association of Securities
Dealers Automated Quotations (the NASDAQ) and found a positive associa-
tion between CH and CG mechanisms, including founder-CEO. They have also
provided an evidence that in firms where CEOs are the founders, the impact of
the board is higher compared to other firms having alternate structures. These
evidences help us to hypothesize that the firms with founder-CEOs accept large
CH because of the aligned interests in ASEAN countries. Thus, based on interest
alignment and monitoring theory, we hypothesize for ASEAN countries:

H5 There is a positive relationship between founder-CEOs and CH among firms in

ASEAN countries.

13
2204 T. Akhtar et al.

2.5 Board independence and cash holdings

An important CG instrument in the effective monitoring employed by the BOD over

management is board independence (Boubaker et al. 2013). Independent external
directors do not have direct financial benefits in the corporations except fees, unlike
other members of the BOD who possess the directorship and, thus, supposed to have
a purpose to monitor the management activities (Adams et al. 2010; Rosenstein and
Wyatt 1990).
The personal interest of the independent directors lies in improving human capi-
tal, which is strictly connected to their reputation as independent specialists in the
financial market (Fama and Jensen 1983). The performance of the independent
directors results in competition among them regarding the director compensation
and labour market. This competition encourages independent directors to put every
effort in monitoring management activities (Yermack 2004). The minority share-
holders who have less control over the firm can be strengthened by the presence of
independent directors (Kim et al. 2007). Thus, the role of independent directors is
effective mainly in environments where private benefits are drawn by outside share-
holders (Dahya et al. 2008).
Chahine and Filatotchev (2008) argued that the independent board reduces infor-
mation asymmetry and improves the degree of information disclosure to the share-
holders. Lee and Lee (2009) suggested that firms with independent boards help
organizations in reducing managerial entrenchment and expropriation of the firms’
resources. The independent directors strongly monitor the firms that reduce the man-
agers’ self-interest. Therefore, board independence delivers better shareholder pro-
tection and decreases the agency costs of high CH (Opler et al. 1999). As a result,
shareholders expect higher CH in the firms with the greater number of independent
directors. Opler et al. (1999), Brenes et al. (2011), Sheikh and Khan (2015) have
also reported that higher board independence leads to more cash reserves. This argu-
ment is relevant for the firms operating in the ASEAN countries. Thus,

H6 There is a positive relationship between independent directors and CH in

ASEAN.

2.6 Board size and CH

The quality of BOD depends on the number of people involved in the board for
monitoring managerial behaviour and is based on the cooperation and easiness
of communication in the board room which itself is dependent on the number of
BOD. A larger board offers a wider pool of knowledge and skills (Boubaker et al.
2013). The involvement of large board size leads to higher competing effects, i.e.,
more rigid decision-making versus greater monitoring. In other words, there is a
trade-off between monitoring and free-riding problems of the larger board as the
entrenched managers are optimally monitored when chances to derive private bene-
fits are higher (Boone et al. 2007; Harris and Raviv 2006). If the board is effectively
monitoring the managers, it would limit the management’s propensity to spend

13
Chief Executive Officers’ monitoring, board effectiveness,… 2205

on non-profitable projects, which results in reducing their tendency to accumulate

excessive cash (Al-Dhamari and Ismail 2014).
Steiner (1972) argued that the organizational behavioural studies are used to draw
the agency implications of board size, implying that a larger pool of people may lead
to substantial loss of output. Free-riding problems in bigger groups, difficulties in
coordination as well as slower decision-making could be the main source for such
damages (Boubaker et al. 2013). The corporation’s inadequacies appear to be very
much considerable compared to a wider pool of skills and knowledge of the larger
board, and thus, probably implying potentially important agency costs.
Lipton and Lorsch (1992) provided more insights and argued that efficient coor-
dination occurs when there are fewer directors in the firms because of the proper
implementation of monitoring tasks. Jensen (1993) also argued that CEOs have
more opportunities to dominate the board of firms with larger board size because
numerous directors tend to favour managements’ decisions rather than criticizing
them. In addition, Yermack (1996), Eisenberg et al. (1998), and Mak and Kusnadi
(2005) found that large boards are detrimental to the value of a firm in the U.S.,
Finnish, Singapore, and Malaysian markets, respectively. As a result, board size
seems to be important in the agency issues, as the options for majority shareholders
over manipulating firm assets are higher when board size is larger and vice versa.
Lee and Lee (2009) and Al-Dhamari and Ismail (2014) argued that the involvement
of more people on the board leads to an inefficient and slower decision-making pro-
cess resulting in less control over managers and could allow the managers to use
cash for empire building, triggering agency cost linked with high CH. It is likely that
there could be an inverse relationship between board size and CH. Thus, following
the agency perspective in ASEAN markets, this study develops that:

H7 There is a negative relationship between board size and CH among the firms in
ASEAN.

2.7 The moderating effect of CEO’s monitoring (CEO‑duality and founder‑CEO)

and board structure (board size and board independence) on the association
between CH and expected managerial entrenchment

This study also integrated the moderating effect of CEO monitoring (CEO-duality
and founder-CEO) and efficient board structure (smaller board size and higher board
independence) on managerial entrenchment. Lee and Lee (2009) have argued that
the entrenchment effect of managers is mitigated when there is a strong CEO moni-
toring and efficient board structure. Chen (2008), Chen and Chuang (2009), Lee and
Lee (2009), Boubaker et al. (2013), and Yu et al. (2015) have shown that firms with
a greater percentage of independent directors, lower MG-Own level and a higher
proportion of founder-CEO represent strong CG. This strong CEO monitoring and
efficient board structure can reduce the potential friction between the managers and
shareholders in the market. Therefore, if managers spend cash in private rent-seek-
ing deeds by holding a larger portion of shares, these strong governance mechanisms
will stop them from doing so. Thus, this study also integrated the moderating effect

13
2206 T. Akhtar et al.

of strong CEO monitoring and efficient board structure on managerial entrenchment

effect of the manager by hypothesizing that:

H8 Strong CEO monitoring and board structure mitigate the managerial entrench-
ment effect (of managers) on CH among firms in ASEAN markets.

3 Methodology

3.1 Sample

The study has used Thomson Reuter’s database for screening purpose for the list of
firms from the manufacturing sector in the ASEAN region, which is shown in Fig. 1.
The study initially targeted all listed manufacturing firms from the member coun-
tries of the ASEAN. The firms having detailed financial statements i.e., disaggre-
gated data for both dependent and independent variables for the period 2005–2015
were included in this study. Our initial target was to study a sample of firms from
2000 to 2015. The reason to focus on 2000 is that these countries were adversely
affected by the financial crises of 1997–1998. Since, the study aims to investigate
the impact of corporate governance and cash holdings, a sample covering more
countries and a larger pool of firms is better suited for the analysis. However, due to
the missing data on CG and financial variables for most of the firms for 2000–2004,
we have to restrict the sample period from 2005 until 2015.2 After imposing data
availability requirements, the sample size was reduced to 648 firms (from a total of
958 firms) making 7128 firm-year observations. Following Dittmar et al. (2003) and
Ammann et al. (2011), extreme values are winsorized for financial data at 1st and
99th percentiles to reduce the effect of outliers. The summary of the sample firms
from each market is shown in Table 1.
The purpose of studying the firms from the manufacturing sector is that the
products of these firms have comparatively shorter life cycles and these firms
generally face very dynamic competition in the market (Carpenter and Petersen
2002). Firms dependent on technology such as manufacturing firms have to meet
daily operation needs through cash. These firms assign resources to avail the
possible future opportunities and to stay in the competition. Lack of funds will
lead to sacrificing the available opportunities in the future, which is a threat for
them to lose a competitive advantage (Chen and Chuang 2009). To avoid the
losses, firms in the manufacturing sector generally hold a higher level of cash,
as compared to other sectors. When cash levels are higher, the chances of pri-
vate extractions are also higher along with the transaction costs and precaution-
ary motives. This study aims to check the strength of governance mechanisms
in mitigating the private extractions in firms with an abundance of investment
opportunities.

2
For some of the firms’ annual reports were missing, for some other firms the data on CG was not avail-
able and for some firms, the annual reports were not available in the English language.

13
Chief Executive Officers’ monitoring, board effectiveness,… 2207

Fig. 1  Thomson Reuter (Eikon) screening process

3.2 Data collection

The secondary method of collecting data was used to collect information about
the variables used in this study. The panel data used to conduct the study was
extracted from the websites of Stock Exchanges, the firms’ annual reports and the
Thomson Reuter Eikon. The operationalization of the variables is presented in
Table 2.

3.3 Empirical model

The impact of CG on CH is tested through regression analyses. The economic

determinants of corporate CH are controlled. The regression equation (Eq. 1) for

13
 2208

13
Table 1  Number of sample firms from each market (from Thomson Reuter)
SIC primary division name TRBC economic sector name Malaysia Singapore Indonesia Thailand Philippines Total

Manufacturing Basic materials 114 65 53 85 11 328

Manufacturing Consumer cyclical 80 49 42 72 5 248
Manufacturing Energy 3 9 2 11 4 29
Manufacturing Healthcare 14 10 9 3 1 37
Manufacturing Industrials 88 73 16 39 1 217
Manufacturing Technology 35 45 13 6 99
Total 334 251 122 223 28 958
Data availability 262 178 68 116 24 648
%Age 40.4 27.4 10.5 18 3.7 100%
Firm year observations 2882 1958 748 1276 264 7128
T. Akhtar et al.
 Table 2  Operationalization of the variables (variables proxies, calculations and measurement units)
Variables Proxy Calculation Unit measurement

Dependent variables (Source: Thomson Reuter Eikon)

Cash to total assets Cash/TA The ratio of cash to total assets Ratio (%)
Cash to sales Cash/sales The ratio of cash to sales Ratio (%)
Cash to net assets Cash/NA The ratio of cash to net assets Ratio (%)
Independent variables (Source: Annual Reports of the firms)
Managerial ownership Mg-Own The percentage of shares owned by CEO and the management of the firm Ratio (%)
BOD ownership BOD-Own Number of shares owned by the board of directors divided by the number of shares outstand- Ratio (%)
ing
CEO-duality CEO-duality Dummy variable which equals one if CEO is performing both the role of chairman of the Dummy variable 0 and 1
board and CEO and equals zero otherwise
Founder CEO Found-CEO Dummy variable that equals one if a CEO is the founder and zero otherwise Dummy variable 0 and 1
Board size BS The natural log of the number of directors on the board Natural Log
Chief Executive Officers’ monitoring, board effectiveness,…

Board independence BI The ratio of independent directors to total directors Ratio (%)
Control variables (Source: Thomson Reuter Eikon)
Firm size FS The log of the book value of total assets Natural Log
Cash-flow CFTA EBITDA less interest, taxes, and dividends, and it is scaled by total assets Ratio (%)
Cash-Flow volatility F-vol The standard deviation of cash flow over average total assets SD of CFTA
Growth opportunities (Tobin’s Q) Tobin’s Q Book value of total assets minus the book value of equity plus the market value of equity, Ratio (%)
which is then divided by the book value of the assets
Dividends dummy Divi-dummy A value of “zero” is assigned if a firm does not pay out dividends, but a value of “one” is Dummy variable 0 and 1
assigned if it has paid out dividends
Net working capital NWC Current assets net of cash holdings minus current liabilities divided by total assets Ratio (%)
Leverage Lev Total debt over total assets Ratio (%)
Research and development R and D Research and development expenses scaled by sales Ratio (%)
Capital expenditures Cap-Exp Capital expenditure to total assets Ratio (%)
2209

13
2210 T. Akhtar et al.

estimations follows Opler et al. (1999), with a set of proxies for corporate owner-
ship, leadership structure and board attributes.
CHi,t = 𝛽0 + 𝛽1 MGOwni,t + 𝛽2 MGOwnSQi,t + 𝛽3 BODOwni,t + 𝛽4 BSi,t + 𝛽5 BIi,t
+ 𝛽6 FounderCEOi,t + 𝛽7 CEOdualityi,t + 𝛽8 FSit + 𝛽9 CFTAi,t
+ 𝛽10 VCFTAi,t + 𝛽11 GOi,t + 𝛽12 NWCi,t
+ 𝛽13 Levi,t + 𝛽14 RDi,t + 𝛽15 CapExpi,t + 𝛽16 [Link],t
+ YearDummies + ei,t
(1)
Our baseline model is estimated using a fixed effects approach.3 For each equa-
tion, we have used the firm fixed effects along with Rogers (1993) clustered stand-
ard errors, to deal with both heteroscedasticity and autocorrelation. Year dummies
are counted into control for different business cycles and macroeconomic effects.
The study further examined the moderating effect of CEO monitoring and efficient
board structure on the association between CH and expected managerial entrench-
ment (the proxy used for managerial entrenchment is MG-Own-SQ). For doing this,
we interact CEO monitoring, including CEO-duality, founder-CEO, as well as BOD
structure, including board size and board independence, with MG-Own-SQ. The fol-
lowing regression equation (based on the model of Lee and Lee (2009)) is used:
CHi,t = 𝛽0 + 𝛽1 MGOwni,t + 𝛽2 MGOwnSQi,t + 𝛽3 BODOwni,t + 𝛽4 BSi,t + 𝛽5 BIi,t
+ 𝛽6 FounderCEOi,t + 𝛽7 CEOdualityi,t + 𝛽8 MGOwnSQ*CEOdualityi,t
+ 𝛽9 MGOwnSQ*[Link],t + 𝛽10 MGOwnSQ*BSit + 𝛽11 MGOwnSQ
∗ BI + 𝛽12 FSit + 𝛽13 CFTAi,t + 𝛽14 VCFTAi,t + 𝛽15 GOi,t + 𝛽16 NWCi,t
+ 𝛽17 Levi,t + 𝛽18 RDi,t + 𝛽19 CapExpi,t + 𝛽20 [Link],t
+ YearDummies + ei,t
(2)

4 Analyses

4.1 Descriptive statistics

The summary statistics of the variables used are presented in Table 3. Cash/TA
has a mean of 13.1%. The result is consistent with the average value reported by
Kalcheva and Lins (2007), indicating a higher level of cash with a standard devia-
tion of 12.8%. Cash/Sales has a mean value of 19.7% and a standard deviation of

3
We have conducted the Hausman (1978) specification test each time to select the preferred model (ran-
dom effects vs. the fixed effects). The study tests the null hypothesis, “the unique errors are not cor-
related with the regressors”. The lower p value leads to the rejection of null hypothesis, which means
the rejection of random effects for models. Each time we have found the fixed effects as an appropriate
model for the study.

13
Chief Executive Officers’ monitoring, board effectiveness,… 2211

Table 3  Descriptive statistics

Variables Mean SD Minimum Maximum 1st quartile 3rd quartile

Dependent variables
Cash/TA (%) 0.131 0.128 0 0.5989 0.034 0.19
Cash/sales (%) 0.197 0.304 0 1.916 0.036 0.221
Cash/NA (%) 0.215 0.602 − 0.057 1.01 0.035 0.33
Corporate governance
BOD-Own (%) 7.41 11.31 0 54.7 0 10.19
MG-Own (%) 11.59 16.66 0 68.49 0 18.22
MG-Own-SQ 412.11 868.62 0 4690.88 0 331.96
CEO-duality 0.342 0.474 0 1 0 1
Founder-CEO 0.336 0.472 0 1 0 1
Board size 7.44 2.57 3 16 6 9
Log (board size) 1.94 0.34 1.09 2.772 1.79 2.19
Board independence (%) 0.418 0.122 0 1 0.33 0.5
Control variables
Firm size ([Link]) (%) 3.63 1.964 0 8.117 3.34 5.11
CFTA (%) 0.078 0.128 − 0.438 0.51 0.017 0.14
Growth opportunities (MTB) (%) 1.304 0.604 0 1.95 1.38 1.73
NWC (%) 0.065 0.128 0 0.83 0.006 0.069
Leverage (%) 0.186 0.20 0 0.97 0.22 1
Profitability (%) 0.036 0.111 − 0.491 0.334 0 0.97
R and D (%) 0.151 0.887 0 7.34 0 0.58
Capital expenditure 0.67 29.8 − 225.56 9.6 − 7.5 0.4
Dividend dummy 0.487 0.501 0 1 0 1

30.4%. The mean of Cash/NA is 21.5% with a standard deviation of 60.2%. The
higher values of cash are consistent with the observations in the literature, for exam-
ple; Dittmar and Mahrt-Smith (2007) found 13% of total assets and Yung and Nafar
(2014) reported that an average of 14.9% of the firm’s assets are in the form of cash.
These results suggest that the level of CH for the firms in ASEAN markets is quite
higher, like in other industrialized countries.
For the CG measures, the average BOD-Ownership is 7.41% with a standard
deviation of 11.31. MG-Own has a mean of 11.59%, higher than that of BOD-Own.
The aggregate shareholding by the managers and the BOD is almost 19%, which is
lower than the average shareholding of 28.9%, reported by Yu et al. (2015) for the
managers and the BOD. In the overall sample, the insiders on average hold a major
portion of the shares. Such a level of ownership advocates that managers and BODs
may possibly have higher decision-making influence compared to other key stock-
holders in the firms. The CEO chairs the board in 34.2% of the firms which is higher
than 27% i.e., percentage of the individuals who are serving as both chairman of the
BOD and CEO as reported by Yu et al. (2015).

13
2212 T. Akhtar et al.

In the current sample, 33.6% of the firms have founder-CEOs which is higher
than 0.2 as reported by Chen and Chuang (2009). The board size in the sample has
an average of 7.44 directors, which is similar to Chen (2008) but smaller than the
average board size of some previous studies (e.g., Bushman et al. (2004) and Core
et al. (1999) reported 11.22 and 13 directors, respectively). This is possibly because
most of the firms are from developing economies, which are often smaller than the
firms in traditional industries of the developed economies. The average independent
BOD to total BOD ratio is 41.8%. The higher independent BOD’s proportion than
expected reflects the fact that the commissions within the boards keep high board
independence for the firms.
For the financial data, the mean logarithm of total assets is 3.63 that is similar to
the numbers in Opler et al. (1999) and Chen (2008). The mean annual cash-flows
firms are generating is around 7.8% of total assets. Furthermore, the average market
to book ratio is 1.304, which is almost equal to the number reported by Opler et al.
(1999) and Yu et al. (2015). This verifies that the firms operating in the ASEAN
region have good investment opportunities. In other words, a higher market to book
ratio also shows that most of the listed firms perform well. For net working capital
(NWC), the mean is 6.5%. The higher ratio indicates firm’s credit in guarding its
operating loss. On average 18.6% of the firm’s assets come from debt which is less
than the average leverage reported by Yu et al. (2015) for Taiwanese firms, indicat-
ing that the greater cost of debt financing leads to a decrease in debt than equity for
ASEAN firms.
The firms in the ASEAN region spend 15.1% of total assets on R and D on aver-
age, which is lower than 37.3% reported by Chen and Chuang (2009) and higher
than the 2.7% reported by Opler et al. (1999) that prevails in the U.S. or other indus-
trial economies. 6.7% of the firms’ assets are used for capital expenditure, which is
smaller than 9.0% as reported by Opler et al. (1999).

4.2 Correlation

The correlation coefficients are shown in Table 4. Multicollinearity occurs when the
model has a high value for the R-squared, significant F-statistics but insignificant
t-ratios. Higher correlation coefficients (r ) among the independent variables can also
indicate the signs of multicollinearity. The decision rule for the existence of multi-
collinearity is if r > 0.8 and multicollinearity does not exist if r < 0.8 (Gujarati and
Porter 2009). As the r-value is less than 0.8 for all of the variables, it means that
there is no issue of serious multicollinearity in the models for the study.

4.3 Regression results

Table 5 presents the regression findings based on CH on several board character-

istics, ownership structure and leadership style. The explanatory power of the esti-
mated model looks fairly satisfactory. The coefficients of determination of the esti-
mated regressions (within ­R_ squared) range between 1.9 and 27%.

13
 Table 4  Correlations
Cash/TA Cash/sales Cash/NA BOD-Own MG-Own CEO-duality Founder-CEO Board Size Board independence

Cash/TA 1
Cash/sales 0.7117* 1
Cash/NA − 0.0233* 0.0311* 1
BOD-Own − 0.0285* − 0.0430* − 0.0051 1
MG-Own 0.0051* 0.0064 0.0067* 0.0838* 1
CEO-duality 0.0166 0.0281 0.0098 − 0.0762* 0.2317* 1
Founder-CEO 0.0325* 0.0439* 0.0136 0.0029 0.4938* 0.3123* 1
Board Size − 0.0603* − 0.0723* − 0.0104 0.0724* − 0.0927* − 0.0679* − 0.0851* 1
Board independence 0.0204* 0.0331* − 0.0171 − 0.0338* 0.0854* 0.1512* 0.1252* − 0.3113* 1
Firm size 0.0631* 0.0619* 0.0450* − 0.1232* − 0.0920* − 0.0208* − 0.0324* 0.2258* − 0.0257*
CFTA 0.2109* 0.004 0.0688* 0.0576* − 0.0104 − 0.0624* 0.0089 0.0617* − 0.0509*
CF-Vol. 0.1627* 0.0984* − 0.0328* − 0.0235* − 0.0185 0.0428* − 0.0418* − 0.0679* 0.0254*
Chief Executive Officers’ monitoring, board effectiveness,…

Growth opp. (MTB) 0.3802* 0.2811* − 0.0306* 0.0520* 0.0491* − 0.0422* 0.0101 0.0331* − 0.0039
NWC 0.3284* 0.2771* − 0.0449* 0.0943* 0.0641* − 0.0012 0.0248* − 0.1138* − 0.0219*
Leverage − 0.0131 − 0.0095 − 0.0037 − 0.0094 0.0035 0.0194 − 0.0104 − 0.017 0.0075
R and D 0.1485* 0.1480* 0.005 − 0.0107 0.0174 0.0661* 0.0516* − 0.001 0.0389*
Capital expenditure 0.0296* 0.0122 − 0.0075 0.1017* 0.0836* − 0.0171 0.0434* − 0.1760* 0.0652*
Dividend dummy 0.2026* 0.0395* − 0.0147 0.0245* − 0.0146 − 0.0311* − 0.0054 0.2068* − 0.0445*
Firm size CFTA CF-Vol. Growth opp. (MTB) NWC Leverage R and D Capital expenditure Dividend dummy

Cash/TA
Cash/sales
Cash/NA
BOD-Own
MG-Own
2213

13
CEO-duality
 Table 4  (continued)
2214

Firm size CFTA CF-Vol. Growth opp. (MTB) NWC Leverage R and D Capital expenditure Dividend dummy

13
Founder-CEO
Board Size
Board independence
Firm size 1
CFTA 0.1538* 1
CF-Vol. − 0.0668* 0.1209* 1
Growth opp. (MTB) 0.3646* 0.2392* 0.0364* 1
NWC − 0.3756* 0.0059 0.0672* 0.2887* 1
Leverage − 0.0386* − 0.0145 0.0340* − 0.0532* − 0.004 1
R and D 0.1265* 0.0139 0.0099 0.0172 − 0.004 − 0.003 1
Capital expenditure − 0.4889* − 0.0212* − 0.0163 0.0237* 0.1627* 0.0051 − 0.0978* 1
Dividend dummy 0.3553* 0.3893* 0.0161 0.3124* − 0.0567* − 0.0159 0.0409* − 0.1567* 1
T. Akhtar et al.
 Table 5  Regression estimating the impact of corporate governance on cash holdings
Independent variables Cash/TA Cash/sales Cash/NA Log (Cash/TA) Log (Cash/sales) Log (Cash/NA)

BOD-Own Coefficient − 0.0008 − 0.0014 − 0.0002 − 0.0053 − 0.007 0.0008

SE (0.00012)*** (0.00031)*** (0.00056) (0.0013)*** (0.0013)*** (0.0016)
MG-Own Coefficient 0.0007 − 0.0006 0.003 0.011 0.011 0.025
SE (0.000259)*** (0.000652) (0.0009)*** (0.0027)*** (0.0028)*** (0.0032)***
MG-Own-SQ Coefficient − 0.00002 − 2.21e− 07 − 0.000054 − 0.00025 0.00025 − 0.0004
SE (4.70E − 06)*** (0.0012) (0.0016)*** (0.00005)*** (0.0005)*** (0.00006)***
CEO-duality Coefficient 0.0047 0.0074 0.012 0.0047 0.044 − 0.068
SE (0.0031) (0.007) (0.015) (0.032) (0.033) (0.0413)*
Founder-CEO Coefficient 0.0077 0.030 0.009 0.093 0.080 0.110
SE (0.0033)** (0.0087)*** (0.0096) (0.033)*** (0.0343)** (0.0417)***
Board size Coefficient − 0.019 − 0.041 − 0.059 − 0.23 − 0.24 − 0.211
SE (0.0043)*** (0.0111)*** (0.0168)*** (0.0468)*** (0.052)*** (0.0583)***
Chief Executive Officers’ monitoring, board effectiveness,…

Board independence Coefficient − 0.0025 0.010 − 0.11 0.26 0.52 0.062

SE (0.011) (0.0291) (0.0480)*** (0.1196)** (0.127)*** (0.1466)
Firm size Coefficient 0.0044 0.024 0.032 0.06 0.15 0.17
SE (0.0013)*** (0.003)*** (0.018)** (0.019)*** (0.0208)*** (0.0198)***
CFTA Coefficient − 0.105 − 0.13 − 0.43 − 0.95 0.011 0.056
SE (0.0138)*** (0.0332)*** (0.2011)** (0.1289)*** (0.1369) (0.1655)
CF-vol. Coefficient 0.15 0.25 − 0.21 0.96 1.09 − 0.03
SE (0.015224)*** (0.041)*** (0.1340) (0.151)*** (0.1623)*** (0.1869)
Growth opp. (MTB) Coefficient 0.087 0.16 − 0.12 1.08 1.57 − 1.25
SE (0.0051)*** (0.0137)*** (0.0773)* (0.0783)*** (0.0892)*** (0.077)***
NWC Coefficient 0.27 0.61 − 0.03 1.72 2.46 − 0.09
SE (0.0210)*** (0.0540)*** (0.159) (0.1919)*** (0.1675)*** (0.305)
Leverage Coefficient − 0.00015 0.00019 0.0008 − 0.0011 − 0.064 − 0.030
2215

13
SE (6.86E − 07)*** (1.62E − 06) (8.71E − 06) (0.00012)*** (0.0250)*** (0.0490)
 Table 5  (continued)
2216

Independent variables Cash/TA Cash/sales Cash/NA Log (Cash/TA) Log (Cash/sales) Log (Cash/NA)

13
R and D Coefficient 0.017 0.040 − 0.0017 0.13 0.15 0.023
SE (0.001701)*** (0.0051)*** (0.0045) (0.0090)*** (0.0102)*** (0.0182)
Capital expenditure Coefficient 0.0001 0.0003 0.0004 0.0004 0.0003 0.0014
SE (4.64E − 05)*** (0.0001)*** (0.0003) (0.0005) (0.00055) (0.00058)***
Dividend dummy Coefficient 0.026 − 0.008 − 0.065 0.40 0.13 − 0.052
SE (0.003192)*** (0.0078) (0.0284)** (0.0352)*** (0.035)*** (0.0397)
Intercept Coefficient − 0.070 − 0.18 0.48 − 5.02 − 5.7 − 0.28
SE (0.0127)*** (0.0300)*** (0.0822)*** (0.1804)*** (0.1955)*** (0.1713)**
Year fixed effects Yes Yes Yes Yes Yes Yes
Adj. ­R2 0.27 0.17 0.019 0.20 0.23 0.09

The asterisk on each parentheses shows the significance level with *** denotes the significance level at 1%, ** denotes the significance level at 5% and * denotes the sig-
nificance level at 10%
Original tables/results available upon request
All regressions include year fixed effects
Standard errors are corrected for heteroscedasticity and autocorrelation with clustering
T. Akhtar et al.
Chief Executive Officers’ monitoring, board effectiveness,… 2217

Individually all CG variables play a role in affecting the CH. As expected (H1),
the coefficient on MG-Own is positively related to the cash levels in each of the
regressions where it appears at a 1% confidence level, except for Cash/Sales in
Table 5. In terms of economic significance, a 1% increase in the MG-Own leads
to raising the cash levels by 0.07–2.5%. This is in-line with the interest alignment
hypothesis that a lower level of managerial share ownership (MG-Own) is associ-
ated with lower agency cost of a higher level of CH because the friction between
shareholders and managers will be lower in case managers own a higher percentage
of firms shares (Jensen and Meckling 1976; Morck et al. 1988; McConnell and Ser-
vaes 1990; Opler et al. 1999; Chen and Chuang 2009).
The higher level of managerial share ownership (MG-Own-SQ) has shown
a significant negative relationship with CH having a p value less than 0.00 in all
the columns of Table 5 except for Cash/Sales, thus verifying H2. As the economic
determinants of cash (such as, growth opportunities, NWC and other important
determinants that are related to the liquidity needs) are controlled, the indirect rela-
tionship between higher level of managerial equity ownership (MG-Own-SQ) and
CH is the indication that entrenched managers misuse high cash levels to maxi-
mize their personal utility. Consistent with Morck et al. (1988) and Boubaker et al.
(2013), our result shows that higher level of managerial share ownership is related
to a higher entrenchment for the managers who misuse firm’s CH for expropriation
motives, leading to a higher agency cost. Results in the robustness section have fur-
ther confirmed the non-linearity of MG-Own.
The positive impact of MG-Own and the negative impact of MG-Own-SQ on
CH, imply that the level of cash increases with MG-Own until a certain level before
it starts decreasing. Thus, a concave relationship between CH and MG-Own is
found. The findings are consistent with Yu et al. (2015).
The results suggest that managers are permitted to hoard extra cash as there is
less anxiety about the managers mishandling it. This is because firms are often
financially constrained as far as raising external capital in the developing markets
is concerned and thus firms have to use internal cash to fund their operations to
some extent. However, when there is an increase in the level of managerial owner-
ship (MG-Own-SQ), investors should prevent the build-up of higher cash because
it leads to divergence of managerial interests from stakeholder meaning invested in
wasteful projects.
The coefficient on BOD-Own is negative and significant at 1% confidence level
with all the measures of cash except for log(Cash/NA), showing that levels of CH
are smaller in the firms where BOD has the ownership. The findings are consist-
ent with the prediction that a higher percentage of BOD-Own decreases the level of
cash. In terms of economic significance, when BOD-Own decreases by 1%, the ratio
of cash decreases on an average from 0.08 to − 0.7% (coefficients of BOD-Own are
presented in Table 5). The negative sign seems to be consistent with the argument
that a greater board of directors’ ownership helps to force managers to expel excess
cash resources. Thus, cash is invested in the wasteful projects, resulting in a lower
level of cash available in the firm and leading to a higher agency cost.
The coefficient on CEO-duality is significant with a negative sign only with log (Cash/
NA) in Table 5 but the relationship is weak as significant at a 10% significance level. The

13
2218 T. Akhtar et al.

CH is affected by the duality of the CEO but the evidence is very weak. The coefficient
on the log (Cash/NA) shows that the cash ratio is 6.8% lower when the CEO acts as the
chairman of the board than when these designations are held by the different individuals.
Thus, combining CEO and chairman roles jeopardizes monitoring and decreases CH.
This is consistent with the entrenchment hypothesis, confirming the views of
Opler et al. (1999) who argued that higher control rights by the managers can moti-
vate them to peruse their self-interest at the expense of stockholders. CEO-duality
seems to lower CH and is consistent with the prediction of H4 that suggests an
increase in the level of cash with a higher percentage of CEO-duality. CEO-dual-
ity has confirmed a significant negative relationship with cash in the majority of
the cash measures when the robustness tests are conducted. Associated with greater
agency costs, the CEO’s influence on the actions of BOD in the firms with CEO-
duality results in expropriation by the insiders (Boubaker 2007).
The sample firms in the current study are also based on concentrated control struc-
tures. Thus, the firm having lower cash reserves with the dual CEO functions is the
indication that the absence of separation between the CEO and chairman of the BOD
roles leads to the misuse of cash. In such agency settings, the mishandling of cash
reserves should increase the controlling shareholders’ ability to get more personal ben-
efits from the firm’s wealth at the cost of minority shareholders (Boubaker et al. 2013).
The coefficient of founder-CEO is found to be significant and positive with the
majority of the cash measures at 1 and 5% levels, respectively. Cash, therefore, is likely
to be higher in firms with founder-CEO than in those with non-founder-CEO validat-
ing H5. In terms of economic significance, when a firm shifts from founder-CEO to
a non-founder-CEO, ceteris paribus, the cash ratio diminishes between a mean range
of 0.77% and 11% for different measures of cash. This is consistent with the results of
Chen and Chuang (2009), who supported the interest-alignment hypothesis that there
is a direct relationship between founder-CEO and CH. Overall, the results are in-line
with the view that higher ratios of founder-CEOs in the firms result in reducing agency
costs and decreasing opportunities for mutualizing cash for expropriation reasons.
Board independence is included in the model to analyze its implications on cor-
porate CH. Board independence has shown a significant positive relationship with
CH in Table 5. Economically, a 1% increase in the proportion of independent direc-
tors improves the cash ratios between 26% and 52% on average. Thus, firms with
more independent board seem to experience significantly higher CH endorsing
hypothesis H6 and the findings of Sheikh and Khan (2015).
Board independence has shown a significant positive relationship with all the
measures of CH in the robustness test. The positive relationship of board inde-
pendence with CH assumes the fact that board independence delivers an effec-
tive monitoring mechanism over the increasing cash resources by the manage-
ment. In other words, board independence is therefore likely to capture the level
to which BOD is effective in its oversight of management and seems to increase
the firm resources by the amount that might have converted into private ben-
efits. As the independent directors are more concerned about limiting the major-
ity shareholders’ freedom of action and less obliged to management, they seem
to be controlling the risks of misuse of the cash. Thus, independent boards are
found to be effective when it comes to the firm’s cash management.

13
Chief Executive Officers’ monitoring, board effectiveness,… 2219

The result for the board size yields a significant negative coefficient. That is,
the number of BOD appears to have a significant impact on the level of CH. A
1% increase in the proportion of board of directors’ decreases cash ratios (Cash/
TA) by 1.9% on an average. The negative sign of the board size is consistent
with the view that greater boards are connected with higher coordination and
inefficiency problems (Yermack 1996). Firms with larger board size are likely
to have poor CG, as argued by Wasserman (1988); Hellman and Puri (2000)
because the bigger board indicates poor monitoring (Yermack 1996; Core et al.
1999). This result leads to the acceptance of our hypothesis H7.
The firm-specific factors showed that firm size, cash-flow to total assets
(CFTA), cash-flow volatility, growth opportunities [measured by market to book
ratio (MTB)], NWC, leverage, R and D, capital expenditure and the dividend
dummy are the important financial determinants of CH. We detect that larger
firms are more successful in holding cash than the smaller firms, which supports
the pecking order theory. We have found a positive impact of cash-flow volatility
and growth opportunities on CH. This is consistent with the argument developed
by Bates et al. (2009) that the firms hold higher cash reserves when they have
more growth opportunities and a higher risk of default since liquid assets can
safeguard firms from the unexpected scarcity of other sources of financing.
CFTA and leverage show a significant negative relationship with CH, which
suggests that when there is enough flow of cash internally and also when the
firms can borrow easily then there is no need to hold cash internally. This sup-
ports the trade-off model and is consistent with Ferreira and Vilela (2004) and
Al-Najjar and Belghitar (2011). Furthermore, following Wasiuzzaman (2014) we
provide some evidence regarding R and D and capital expenditure that indicate
riskier investment for the firms. Firms tend to hold higher cash to protect them-
selves from possible losses from these risks. Bigelli and Sánchez-Vidal (2012)
argued that the firms paying dividends hold more cash as firms rich in cash are
likely to earn higher profit, make more dividend payments and can invest more
in the medium-term horizon in the future. We also found the same results for
dividend payments, supporting the predictions of pecking order theory.

4.4 Robustness test

(a) Sub-sample Regression Estimation- Excluding Malaysia and Singapore

To further examine the effectiveness of CG regarding CH, we have conducted

a multivariate analysis for the two sets of sub-samples, separately. To evaluate
whether the results are influenced by one or both of these countries, we re-estimated
the models (Eq. 1) by excluding firms from Malaysia first and then from Singapore.4

4
Malaysia and Singapore have higher external shareholders’ protection. Therefore, when these two
countries are removed from the sample, the dual CEO becomes more active, which indicates the wastage
of corporate assets on the wasteful projects.

13
 Table 6  Regression estimating the impact of corporate governance on cash holdings by excluding Malaysia and Singapore from the sample
2220

Independent variables Cash/TA Cash/sales Cash/NA Log (Cash/TA) Log (Cash/sales) Log (Cash/NA)

Panel A: Exclude Malaysia

13
BOD-Own Coefficient − 0.0008 − 0.0020 − 0.0008 − 0.002 − 0.006 0.0018
SE (0.000191)*** (0.000508)*** (0.000856) (0.001988) (0.00222)*** (0.002374)
MG-Own Coefficient 0.0026 0.00039 0.0023 0.028 0.023 0.026
SE (0.000407)*** (0.001085) (0.001827) (0.004245)*** (0.00474)*** (0.00507)***
MG-Own-SQ Coefficient − 0.00004 − 0.000011 − 0.00004 − 0.0004 − 0.00038 − 0.00037
SE (7.49E−06)*** (0.00002) (3.36E−05) (7.81E−05)*** (8.72E−05)*** (9.33E−05)***
CEO-duality Coefficient − 0.0046 − 0.0042 − 0.016 − 0.03 − 0.013 − 0.11
SE (0.004549) (0.012116) (0.020416) (0.047422) (0.052957) (0.05664)**
Founder-CEO Coefficient 0.0060 0.024 0.010 0.021 0.031 0.11
SE (0.005135) (0.013675)** (0.023043) (0.053526) (0.059774) (0.063931)***
Board size Coefficient − 0.029 − 0.044 − 0.11 − 0.33 − 0.31 − 0.37
SE (0.005452)*** (0.014521)*** (0.024468)*** (0.056836)*** (0.06347)*** (0.067884)***
Board independence Coefficient 0.076 0.15 − 0.048 0.90 1.04 − 0.13
SE (0.017598)*** (0.04687)*** (0.078978) (0.183454)*** (0.204868)*** (0.219116)
Intercept Coefficient − 0.143814 − 0.302033 1.024858 − 5.171402 − 5.593849 2.039408
SE (0.020036)*** (0.053362)*** (0.089917)*** (0.208862)*** (0.233241)*** (0.249463)***
Year fixed effects Yes Yes Yes Yes Yes Yes
Other control variables Yes Yes Yes Yes Yes Yes
Adj. ­R2 0.27 0.14 0.29 0.23 0.21 0.21
Panel B: Exclude Singapore
BOD-Own Coefficient − 0.001 − 0.0022 − 0.0007 − 0.0088 − 0.010 0.0017
SE (0.000148)*** (0.000382)*** (0.000347)*** (0.001793)*** (0.00194)*** (0.002129)
MG-Own Coefficient 0.00027 − 0.0006 0.0032 0.0029 0.0025 0.026
SE (0.000319)** (0.000824) (0.000748)*** (0.003865) (0.004183) (0.004592)***
T. Akhtar et al.
 Table 6  (continued)
Independent variables Cash/TA Cash/sales Cash/NA Log (Cash/TA) Log (Cash/sales) Log (Cash/NA)

MG-Own-SQ Coefficient − 0.00001 1.97e−06 − 0.00005 − 0.00014 0.00009 − 0.0004

SE (6.40E−06)*** (1.65E−05) (0.000015)*** (7.75E−05)** (8.39E−05) (9.21E−05)***
CEO-duality Coefficient 0.0010 − 0.012 − 0.0028 − 0.099 − 0.089 − 0.039
SE (0.003398) (0.008768) (0.007961) (0.041147)*** (0.044531)*** (0.04888)
Founder-CEO Coefficient 0.0036 0.014 0.0095 0.056 0.05 0.054
SE (0.00389) (0.010037) (0.009113) (0.047097) (0.050971) (0.055949)
Board size Coefficient − 0.0034 − 0.015 − 0.020 − 0.024 − 0.061 − 0.068
SE (0.004412) (0.011383) (0.010335)*** (0.053416) (0.05781) (0.063456)
Board independence Coefficient 0.005 − 0.024 − 0.03 0.410 0.484 0.303
SE (0.013253) (0.034195) (0.031047) (0.160463)*** (0.173663)*** (0.190623)*
Intercept Coefficient − 0.118983 − 0.231476 1.003926 − 5.30133 − 5.571563 1.597297
SE (0.016424)*** (0.042376)*** (0.038475)*** (0.198853)*** (0.21521)*** (0.236228)***
Chief Executive Officers’ monitoring, board effectiveness,…

Year fixed effects Yes Yes Yes Yes Yes Yes

Other control variables Yes Yes Yes Yes Yes Yes
Adj. ­R2 0.28 0.18 0.29 0.23 0.21 0.17

The asterisk on each parentheses shows the significance level with *** denotes the significance level at 1%, ** denotes the significance level at 5% and * denotes the sig-
nificance level at 10%
Original tables/results available upon request
All regressions include year fixed effects
Standard errors are corrected for heteroscedasticity and autocorrelation with clustering
2221

13
2222 T. Akhtar et al.

Panel A and Panel B in Table 6 report the results of the relationship between CG and
CH by excluding Malaysian firms and Singaporean firms from the sample, respec-
tively. Firms’ financial variables used as control variables are the same although not
mentioned in the tables for brevity.
The results for the ownership variables are similar as reported earlier with greater
magnitude. In both Panel A and Panel B, BOD-Own is still negative and significant
with the majority of the CH measures. The results for MG-Own and MG-Own-SQ
are consistent with the previous models, as they have shown positive and negative
relationships with CH, respectively. The signs of coefficients are same for all of the
ownership variables both in Panel A and Panel B, as we have in the previous model.
Thus, a non-linear relationship between CH and MG-Own is confirmed.
We have found similar results for CEO-duality but significant with log (Cash/NA)
only in panel A and for log measures of cash in panel B. On the other hand, founder-
CEO becomes insignificant in panel B. This indicates a stronger role of dual CEO
while a weaker role of founder-CEO in the countries with poor investor protection.
For board size and board independence, the results have shown a significant nega-
tive and positive impact on CH, respectively, but with a greater magnitude.
Overall, the results for ownership variables (MG-Own, MG-Own-SQ, and BOD-
Own), board independence and board size are similar in all the specifications, as
we have in Table 5. The only difference is of founder-CEO and CEO-duality. The
role of founder-CEO becomes less important in the countries with weaker investors
protection, and the negative significant impact of CEO-duality is in line with the
entrenchment hypothesis.

(b) Regression estimation excluding capital expenditure, leverage, and dividend

According to Dittmar and Mahrt-Smith (2007) financial characteristics like

leverage, capital expenditure, and dividends may create endogenous problems
in CH models. They have added robustness in their model by eliminating these
firm-specific variables. We augmented the same method by eliminating these firm
specific factors and re-estimating the model (Eq. 1). The results in Table 7 proved
the robustness of the already achieved results.5
Collectively, these results indicate that firms with more board independence,
founder-CEO’s, and MG-Own have higher CH. The results are consistent with the
interest alignment hypothesis that firms with stronger CG are related to extensive
monitoring by the management and results in holding more cash in the firms.
On the other hand, firms with a higher percentage of CEO-duality, bigger board
size, BOD-Own and MG-Own-SQ, have a lower CH. These governance attributes
dissipate cash reserves on the wasteful projects, which results in increasing the
agency cost.

5
The results of the financial variables are not reported here for brevity and can be obtained from the
authors upon request.

13
Chief Executive Officers’ monitoring, board effectiveness,… 2223

(c) Generalized method of moments (GMM) results

One of the issues that have been widely discussed in the literature is the prob-
lem of autocorrelation and endogeneity because several decisions in the corpora-
tions are determined endogenously, either contemporaneously or simultaneously
(Chen 2008). Demonstrating that the results might not be valid in the corporate
governance and cash holdings models if the endogeneity issue remains there.
The issues of heterogeneity can be removed with static-panel estimations but
the simultaneous endogenous problem remains there. For this purpose, the GMM
is applied to control for autocorrelation and endogeneity problems, to re-exam-
ine the relationship between CG and CH (Ozkan and Ozkan 2004; Chen 2008).
According to Megginson et al. (2014), firm-specific features, such as dividend
policy, firm growth, leverage, institutional ownership, and capital expenditure,
might be potentially endogenous to CH (Table 7).
This study has employed the Arellano–Bond first-difference (ABFD) GMM
(Arellano and Bond 1991) estimation method to control for potential endogeneity
(Megginson et al. 2014). The GMM estimator by taking difference is appropriate
for panel data in the current study, as this study has a comparatively large unique-
firm dimension and short time dimension. The difference GMM estimator is a use-
ful estimator because it can control for the potential endogeneity of other regressors
along with the unobserved firm heterogeneity. Thus, the first-difference estimation
of GMM is applied to re-examine the results. The estimations by employing GMM
have treated the lagged cash as an endogenous variable and in addition an instru-
mental variable is used. The independent variables are treated as endogenous and
then lagged is taken twice (Ozkan and Ozkan 2004; Chen 2008). Finally, the lags of
the endogenous variables are used as mechanisms. The results are shown in Table 8.
The coefficient of the lagged cash is positive and significantly related to
endorsing a serial relationship of corporate cash. Thus, the estimations of GMM
provide more meaningful analysis to inspect the effect of CG on CH. In GMM,
we are using the lagged CH as an independent variable because the lag represents
the historical value that does not account for any endogenous issue with the cur-
rent governance variables.
Again for most of the variables, the relationship remains the same but this
time for some of the variables the magnitude (significance level) of the relation-
ship changes, as shown in Table 8. For instance, for founder-CEO, board size
and board independence, the coefficient becomes insignificant with Cash/TA. The
majority of the variables have shown a significant relationship and the predicted
sign with Cash/NA.
On comparing the overall results, the study has found that ownership variables
have shown a significant relationship with CH following the predicted signs. For
CEO-duality and founder-CEO, the significance level is much higher than the
previous models. The only exception is for board size and board independence,
which do not show significant results with Cash/TA. Although the magnitude of
the relationship for some of the variables have changed and few variables have
not shown any significance with the predicted signs, the overall results and the
trend is similar to as we have experienced in the previous models. The results

13
 2224

Table 7  Regression estimating the impact of corporate governance on cash holdings by excluding capital expenditure, leverage, and dividends from the model
Independent variables Cash/TA Cash/Sales Cash/NA Log (Cash/TA) Log (Cash/Sales) Log (Cash/NA)

13
BOD-Own Coefficient − 0.0008 − 0.0017 − 0.0011 − 0.0036 − 0.0064 − 0.0007
SE (0.000137)*** (0.000348)*** (0.000586)*** (0.001454)*** (0.001555)*** (0.00175)
MG-Own Coefficient 0.0011 − 0.00054 0.0011 0.013 0.010 0.025
SE (0.00028)*** (0.000715) (0.001203) (0.002983)*** (0.00319)*** (0.003589)***
MG-Own-SQ Coefficient − 0.00027 − 4.42e−06 − 0.00002 − 0.0003 − 0.0002 − 0.0039
SE (5.35E−06)*** (1.37E−05) (0.000023) (0.000057)*** (6.09E−05)*** (6.85E − 05)***
CEO-Duality Coefficient 0.004 0.0039 − 0.016 0.012 0.026 − 0.079
SE (0.003211) (0.008191) (0.013782) (0.034181) (0.036552) (0.041127)**
Founder-CEO Coefficient 0.0079 0.027 0.0024 0.057 0.079 0.093
SE (0.003545)*** (0.009041)*** (0.015213) (0.037728)* (0.040345)** (0.045394)**
Board SIZE Coefficient − 0.021 − 0.060 − 0.050 − 0.18 − 0.25 − 0.15
SE (0.004466)*** (0.011391)*** (0.019168)*** (0.047536)*** (0.050834)*** (0.057196)***
Board Independence Coefficient 0.017 0.029 − 0.038 0.45 0.57 0.19
SE (0.012213)* (0.031149) (0.052412) (0.129985)*** (0.139001)*** (0.156398)***
Intercept Coefficient − 0.14673 − 0.30883 1.058376 − 5.59939 − 5.92332 0.86017
SE (0.015233)*** (0.038852)*** (0.065374)*** (0.162131)*** (0.173377)*** (0.195077)***
Year fixed effects Yes Yes Yes Yes Yes Yes
Other control variables Yes Yes Yes Yes Yes Yes
Adj. ­R2 0.26 0.17 0.05 0.20 0.22 0.12

The asterisk on each parentheses shows the significance level with *** denotes the significance level at 1%, ** denotes the significance level at 5% and * denotes the sig-
nificance level at 10%
Original tables/results available upon request
All regressions include year fixed effects
Standard errors are corrected for heteroscedasticity and autocorrelation with clustering
T. Akhtar et al.
Chief Executive Officers’ monitoring, board effectiveness,… 2225

Table 8  The impact of corporate governance on cash holdings using Generalized Method of Moments
(GMM)
Independent variables Cash/TA Cash/NA

Cash (t − 1) Coefficient 0.409113 0.16643

SE (0.023208)*** (0.005642)**
BOD-Own Coefficient − 0.0002 − 0.0068
SE (0.000366)** (0.001458)***
MG-Own Coefficient 0.0046 0.011
SE (0.000844)*** (0.002385)***
MG-Own-SQ Coefficient − 0.0001 − 0.0004
SE (1.74E−05)*** (4.88E−05)***
CEO-duality Coefficient − 0.016 − 0.004
SE (0.006141)*** (0.030552)
Founder-CEO Coefficient 0.0064 0.23
SE (0.009553) (0.03382)***
Board size Coefficient 0.006 − 0.43
SE (0.01612) (0.053752)***
Board independence Coefficient − 0.0002 0.56
SE (0.020936) (0.090508)***
Year fixed effects Yes Yes
SARGAN test 0.29 0.000
Hansen test 0.33 0.959
AR (2) 0.14 0.283

The asterisk on each parentheses shows the significance level with *** denotes the significance level at
1%, ** denotes the significance level at 5% and * denotes the significance level at 10%
Original Tables/Results available upon request
All regressions include year fixed effects
Standard errors are corrected for heteroscedasticity and autocorrelation with clustering

suggest that the effect of CG is less significant in dynamic-panel after controlling

for potential endogeneity (when all the variables are considered endogenous) and
unobserved firm heterogeneity, than in static-panel estimations.
The rule of thumb for GMM is to keep the number of groups greater than or
equal to the number of instruments. However, due to the lesser number of markets
in the current study, a greater instruments number causes the “Sargan test” to be
weak in the models, shown in the second last row of Table 8. The results of the
Sargan/Hansen test of over-identification shows the validity of the instruments, as
the p-values are higher in the models showing that we are unable to reject the null
hypothesis that all instrumental variables (IVs) are valid, while serial correlation test
shows that the error term of the differenced equation is not serially correlated in the
models. The AR (2) test shows a higher p value, signifying the null hypothesis ‘no
second-order serial correlation’ cannot be rejected.

13
2226 T. Akhtar et al.

4.5 The moderating effect of CEO monitoring (CEO‑duality and founder‑CEO)

and the efficient board structure (smaller board size and higher board
independence) on managerial entrenchment

Table 9 reports the regression results about the moderating effect of CEO moni-
toring (CEO-duality and founder-CEO) and efficient board structure (board size
and board independence) on the association between CH and expected managerial
entrenchment. Cash/TA is used as the dependent variable in the first two models, a
lagged value of Cash/TA is used as a dependent variable in GMM. Column 1 uses
the fixed effects model and the same fixed effects model is applied in column 2 by
eliminating the endogenous effect of capital expenditure, leverage, and dividends.
GMM approach is applied in column 3 to further control for unobserved endogene-
ity and auto-correlation problems. Column 4 reports the results by eliminating MG-
Own, MG-Own-SQ and the interaction term MG-Own-SQ * Board-Size, as these
variables have a higher correlation among them, which cause the problem of multi-
collinearity. Variance inflation factor (VIF) is also provided in column 4.
The results in Table 9 show that the individual CG variables have the same sign
on the coefficients as we have received in the previous models (using Eq. 1) with
the exception for board size in column 3, which has a positive value. The interaction
term between MG-Own-SQ and CEO-duality is positive and significant at less than
1% in all the columns. In terms of economic significance, a coefficient estimate of
0.00,025 suggests that the impact of MG-Own-SQ on CH increases by 0.025% when
firms have a dual-CEO leadership structure.
The most likely explanation of the interaction term ‘MG-Own-SQ*Board-Size’
to be positive is that firms with higher managerial share ownership, those with big-
ger boards and a dual-CEO have higher CH, and that bigger board and a dual-CEOs
weaken the ability of the entrenched managers’ to hold high cash assets.
In contrast, the interaction term between MG-Own-SQ and founder-CEO and
between MG-Own-SQ and board independence are negative and significant. This is
an interesting finding as the standalone coefficients on MG-Own-SQ and founder-
CEO are negative and positive, respectively. However, the negative coefficient on
interaction term ‘MG-Own-SQ*Founder-CEO’ suggests that the negative relation-
ship between CH and a higher level of managerial share ownership is less notice-
able in organizations having a higher ratio of founder-CEO. A similar explanation is
applied to board independence and its impact on managerial entrenchment. Hence,
a greater percentage of founder-CEO and board independence reduces managers’
tendency to waste cash particularly in firms with more agency conflicts arising from
higher levels of MG-Own. Overall, these results lead to the acceptance of H8 and
support the findings of Lee and Lee (2009) that stronger governance helps to miti-
gate the expected managerial entrenchment effect on CH.

4.6 Regression estimations using excess cash and large shareholding

We have performed some additional tests by using excess cash as a dependent vari-
able instead of CH to further confirm our results, using Eqs. 1 and 2. The study

13
 Table 9  Regression estimating the impact of corporate governance on the association between cash holding and expected managerial entrenchment
Independent variables Column 1 Column 2 Column 3 Column 4 VIF for
Fixed effects Excluding capital exp., lever- GMM Fixed effects Column
age, and dividends 4

Cash (t − 1) Coefficient 0.3280732

SE (0.000723)***
BOD-Own Coefficient − 0.00093 − 0.00093 − 0.00020 − 0.001 1.07
SE (0.0001308)*** (0.0001309)*** (2.04E−05)*** (0.000)***
MG-Own Coefficient 0.0011 0.0012 0.0025
SE (0.0002962)*** (0.0002953)*** (3.87E−05)***
MG-Own-SQ Coefficient − 0.00022 − 0.00019 − 0.00031
SE (0.0000149)* (0.000015) (1.63E−06)***
CEO-duality Coefficient − 0.0067 − 0.0075 − 0.010 − 0.005 1.45
SE (0.0034537)** (0.0034444)*** (0.00056)*** (0.003)
Chief Executive Officers’ monitoring, board effectiveness,…

Founder-CEO Coefficient 0.012 0.012 0.015 0.017 1.62

SE (0.0038721)*** (0.003865)*** (0.000762)*** (0.004)***
Board-size Coefficient − 0.016 − 0.010 0.026 − 0.017 1.21
SE (0.004372)*** (0.0043076)*** (0.001171)*** (0.004)***
Board-independence Coefficient − 0.00017 0.0049 092 0.003 1.23
SE (0.0125753) (0.0125314) (0.001029)*** (0.013)
MG-Own-SQ Coefficient 0.00025 0.000025 0.00002 0.00023 3.45
*CEO-duality SE (3.77E−06)*** (3.76E−06)*** (4.25E−07)*** (0.000)***
MG-Own-SQ Coefficient − 9.15e−06 − 8.63e−06 − 9.07e−06 − 0.0018 6.29
*Founder-CEO SE (5.66E−06)* (5.66E−06) (5.87E−07)*** (0.00)***
MG-Own-SQ Coefficient − 3.98e−06 − 6.05e−06 8.01e−06
* board-size SE (5.79E−06) (5.77E−06) (7.69E−07)***
MG-Own-SQ * board-inde- Coefficient − 0.000013 − 0.00017 − 0.000349 − 0.00016 6.43
2227

pendence

13
SE (0.0000147) (0.0000147) (5.64E−07)*** (0.000)*
 Table 9  (continued)
2228

Independent variables Column 1 Column 2 Column 3 Column 4 VIF for

Fixed effects Excluding capital exp., lever- GMM Fixed effects Column

13
age, and dividends 4

Year fixed effects Yes Yes Yes Yes

Adj. ­R2 0.28 0.27
Hansen test p value 0.99 0.282
AR(2) 0.12

The asterisk on each parentheses shows the significance level with *** denotes the significance level at 1%, ** denotes the significance level at 5% and * denotes the sig-
nificance level at 10%
Original tables/results available upon request
T. Akhtar et al.
Chief Executive Officers’ monitoring, board effectiveness,… 2229

has used excess cash to check its relationship with CG because excess cash can
give a clear explanation of whether managers may waste a firm’s resources that are
required for daily operations. Following Opler et al. (1999), Dittmar et al. (2003),
Dittmar and Mahrt-Smith (2007), the study has used the following regression model
to compute the optimal cash.
CHi,t = 𝜒 + 𝜒1 FSi,t + 𝜒2 CFTAi,t + 𝜒3 [Link],t + 𝜒4 NWCi,t +. 𝜒5 CapExpi,t
+𝜒6 [Link],t + 𝜒7 Levi,t + 𝜒8 GOi,t + YearDummies + ei,t , fe
(3)
Only financial variables are used to predict the cash levels because these vari-
ables hold the transaction costs and precautionary motives of cash holdings (Dittmar
and Mahrt-Smith 2007; Iskandar-Datta and Jia 2014). Governance variables are not
included to compute excess cash residual in our specification because these vari-
ables do not account for the operational determinant of cash needed for the opera-
tions (Dittmar and Mahrt-Smith 2007). The fixed effects is applied because of the
idiosyncratic reasons to hold cash in some firms. Year dummies are counted into
control for different business cycles and macroeconomic effects.
Excess cash is then calculated by taking the difference between actual cash and
predicted normal cash. Again, we have found that the results remain the same with
the predicted signs for the majority of the variables when using excess cash as a
dependent variable in the models, as shown in Tables 10 and 11. An additional test
is also run by including large shareholding in the model.6 The results remain the
same with the predicted coefficients and are depicted in Table 12.

5 Conclusion

The study made an attempt to test the role of CG mechanisms in affecting the
cash reserves among firms in ASEAN by using a panel data regression along with
the Generalized Method of Moments (GMM) methodology on a sample of 648
listed firms for 2005–2015. The study has selected the manufacturing sector, per-
formed additional tests of robustness, built hypotheses on the dominant mecha-
nisms prevalent in ASEAN markets and integrated results of the study by taking
into account the famous hypotheses (interest alignment, monitoring, entrench-
ment and managerial power hypotheses) related to this area bridging the existing
gap found in the literature. The study has analyzed the role of managerial and
board of directors’ ownership, types of leadership structure, founder-CEOs, board
size and board independence in determining a firm’s cash policy.
The study proved that a lower percentage of managerial ownership and firms
with founder-CEO hold more cash in ASEAN markets. Hence, we argue that
firms with these CG attributes help to mitigate agency problem, thus support-
ing interest alignment and monitoring hypotheses, which makes the current study

6
We have measured large shareholding as, a shareholder having an equity-ownership of more than 3%
of the outstanding shares (Yu et al. 2015).

13
2230 T. Akhtar et al.

Table 10  Regression estimating the impact of corporate governance on excess-cash

Independent variables Fixed effects GMM

EXCASH t − 1 0.0165
(0.000868) ***
BOD-Own Coefficient − 0.0000503 − 0.00085
SE (0.0000368)* (7.18E−05) ***
MG-Own Coefficient 0.0001022 9.91E−05
SE (0.0000253)*** (0.000156)
MG-Own-SQ Coefficient − 2.26E−06 − 5.82E−06
SE (5.51E−07)*** (2.97E−06) ***
CEO-duality Coefficient − 0.0013534 − 0.0044
SE (0.0005479)** (0.001484)***
Founder-CEO Coefficient 0.0004914 0.00372
SE (0.0008077) (0.001427)**
Board Size Coefficient 0.001212 − 0.007319
SE (0.001128) (0.003397)**
Board independence Coefficient 0.0053723 0.005839
SE (0.0024779)** (0.003155)**
Firm size Coefficient − 0.0028121 − 0.03772
SE (0.0006901)*** (0.001336)***
CFTA Coefficient 0.0654188 0.045686
SE (0.0099871)*** (0.002902)***
CF-Vol. Coefficient − 0.0010463 0.002072
SE (0.0031266) (0.003432)
Growth opp. (MTB) Coefficient − 0.0217499 0.000153
SE (0.0121203)* (0.000022)***
NWC Coefficient 0.2101411 0.167229
SE (0.0180843)*** (0.005406)***
Leverage Coefficient 0.0003075 4.67E−05
SE (0.0012575) (0.000653)
R and D Coefficient − 0.000227 − 0.00045
SE (0.0003328) (0.000633)
Capital expenditure Coefficient − 0.0000381 − 0.00014
SE (5.79E−06)*** (1.86E−05)***
Dividend dummy Coefficient 0.0001556 0.006526
SE (0.0015898)* (0.001202)***
Intercept Coefficient 0.049082
SE (0.0152781)***
Year fixed effects Yes Yes
Adj. ­R2 0.5235

The asterisk on each parentheses shows the significance level with *** denotes the significance level at
1%, ** denotes the significance level at 5% and * denotes the significance level at 10%
Original tables/results available upon request

13
Chief Executive Officers’ monitoring, board effectiveness,… 2231

Table 11  Regression estimating the impact of corporate governance on the association between excess-
cash and expected managerial entrenchment
Independent variables Fixed effects Fixed effects without VIF GMM
highly correlated vari-
ables

EXCash (t − 1) Coefficient 0.072101

SE (0.0188615)***
BOD-Own Coefficient − 0.0000944 − 0.0082 1.07 − 0.0002969
SE (0.0000769) (0.000)*** (0.0001407)**
MG-Own Coefficient 0.0003291 0.0008318
SE (0.0001686)** (0.0004222)***
MG-Own-SQ Coefficient − 0.0000162 − 0.0000717
SE (9.10E−06)** (0.000018)***
CEO-duality Coefficient − 0.0032633 − 0.005 1.45 − 0.0249077
SE (0.0018187)** (0.003) (0.0067389)***
Founder-CEO Coefficient 0.0010087 0.017 1.62 0.0197872
SE (0.0026852) (0.004)*** (0.0085434)***
Board-size Coefficient − 0.0034147 − 0.017 1.21 − 0.0379724
SE (0.0032069)* (0.004)*** (0.0110369)***
Board-independence Coefficient 0.0010291 0.003 1.23 0.0052586
SE (0.0060193) (0.013) (0.0052586)***
MG-Own-SQ * CEO- Coefficient 2.22E−06 0.00023 3.45 8.64E  6
duality SE (2.09E−06)* (0.000)*** (4.35E−6)**
MG-Own-SQ * Coefficient − 2.23E−06 − 0.00018 6.29 7.72E−06
Founder-CEO SE (3.20E−06)* (0.000)*** (6.55E−06)
MG-Own-SQ * Board- Coefficient 6.11E−06 0.0000223
size SE (3.60E−06)** (6.62E−06)***
MG-Own-SQ * Board- Coefficient − 4.12E−07 − 0.00016 6.43 0.0000194
independence SE (5.86E−06)* (0.000)* (0.000011)
Year fixed effects Yes Yes
Adj. ­R2 0.408 0.065

The asterisk on each parentheses shows the significance level with *** denotes the significance level at
1%, ** denotes the significance level at 5% and * denotes the significance level at 10%
Original tables/results available upon request

unique compared to the previous literature. Similarly, higher board independence

has also proved to be beneficial in handling excess cash in ASEAN firms.
On the other hand, we have also found that the firms with higher managerial
and board of directors’ ownership, dual leadership structure and bigger board
hold less cash. We endorsed that these attributes create higher agency cost, thus
supporting managerial power and entrenchment hypotheses. We further document
that strong CEO monitoring (CEO-duality and founder-CEO) and the efficient
board structure (board size and board independence) mitigate the negative impact
of managerial entrenchment related to CH. We proved that even in the presence

13
 Table 12  Regression estimating the impact of corporate governance on cash holdings, including largest shareholder in the model
2232

Independent variables Cash/TA Cash/TA Cash/TA without highly cor- VIF EX-cash
related variables

13
BOD-Own Coefficient − 0.00064 − 0.00094 − 0.001 1.45 − 6.7E−05
SE (0.000141)*** (0.000131)*** (0.000)*** (4.64E−05)*
MG-Own Coefficient 0.001268 0.001105 6.48E−05
SE (0.000295)*** (0.000296)*** (4.31E−05)*
MG-Own-SQ Coefficient − 2.8E−05 − 2.3E−05 − 1.80E−06
SE (4.99E−06)*** (1.49E−05)*** (6.80E−07)**
CEO-duality Coefficient 0.004841 − 0.00677 − 0.005 1.45 − 0.001342
SE (0.003112) (0.003454)** (0.003) (0.000621)**
Founder-CEO Coefficient 0.007966 0.012567 0.018 1.67 0.000473
SE (0.003395)** (0.003872)*** (0.004)*** (0.000741)
Board-size Coefficient − 0.018 − 0.01667 − 0.016 1.22 0.001097
SE (0.004397)*** (0.004373)*** (0.004)*** (0.00105)
Board-independence Coefficient − 0.00114 − 0.00016 0.003 1.23 0.005265
SE (0.012005) (0.012576) (0.012) (0.003143)**
Large shareholders Coefficient − 0.01373 − 0.000588 − 0.005 1.78 0.001032
SE (0.004248)*** (0.002862)*** (0.004) (0.001032)
MG-Own-SQ * CEO-Duality Coefficient 2.55E−05 0.00022 3.46
SE (3.78E−06)*** (0.000)***
MG-Own-SQ * Founder-CEO Coefficient − 9.18E−06 − 0.00018 6.31
SE (5.66E−06)** (0.000)***
MG-Own-SQ * Board-Size Coefficient − 3.99E−06
SE (5.79E−06)
MG-Own-SQ * Board-Independence Coefficient − 1.3E−05 − 0.00013 6.80
SE (1.47E−05)* (0.000)
Year fixed effects Yes Yes Yes Yes
T. Akhtar et al.
 Table 12  (continued)
Independent variables Cash/TA Cash/TA Cash/TA without highly cor- VIF EX-cash
related variables

Adj. ­R2 0.2788 0.2834 0.279 0.5236

The asterisk on each parentheses shows the significance level with *** denotes the significance level at 1%, ** denotes the significance level at 5% and * denotes the sig-
nificance level at 10%
Original tables/results available upon request
All regressions include year fixed effects
Standard errors are corrected for heteroscedasticity and autocorrelation with clustering
Chief Executive Officers’ monitoring, board effectiveness,…
2233

13
2234 T. Akhtar et al.

of higher managerial entrenchment, shareholders need not to show concern about

high CH when strong CEO monitoring and the efficient board structure is present
within the firm.
The implications further suggest that the board may introduce some level of
mandatory managerial and executive ownership in the firms of ASEAN coun-
tries. This may encourage managers to further create the value of a firm because
of their aligned interests with the shareholders. The alignment of the interest of
managers with the firm value will reduce organizational inefficiencies, minimize
the costly monitoring and maximize the efficient utilization of liquid resources.
Furthermore, the board may also improve the percentage of the founder CEOs
and independent directors in the firms of ASEAN countries and encourage them
to play a constructive role in managing cash due to their expertise, wisdom and
knowledge.
On the other hand, firms need to ensure the optimal number of directors on
the board, control the percentage of dual leadership structure, and the managerial
and board of directors’ ownership in the firm. The board can make CEOs holding
both the positions as stewards by either providing them with the incentives or tak-
ing coercive action against them.
Based on the limitations of the study, the future researchers can investigate
the role of CEOs’ age and tenure, block-holding by the family, variations in the
ownership and managerial structure in affecting the level of CH in ASEAN. This
may provide them with novel findings pertinent to the effectiveness of these
instruments in determining corporate governance and cash holdings policies in
ASEAN.

Acknowledgements The authors are thankful for the insights and valuable comments provided by the
anonymous reviewers and Prof. Wolfgang Kürsten, Editor-in-Chief, Review of Managerial Science, in
improving the quality of the article.

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Affiliations

Tahir Akhtar1 · Mohammad Ali Tareq2 · Kashif Rashid3

Tahir Akhtar
tahirakhtar01@[Link]
Kashif Rashid
mkrashid@[Link]
1
Department of Economics and Finance, College of Business Administration, University
of Ha’il, Ha’il, Saudi Arabia
2
International Joint Intellectual Property Laboratory (IJIPL), Malaysia‑Japan International
Institute of Technology (MJIIT), Universiti Teknologi Malaysia-Kaula Lumpur Campus,
Kuala Lumpur, Malaysia
3
Management Sciences Department, COMSATS University Islamabad, Abbottabad Campus,
Abbottabad, Pakistan

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