The effect of cash holdings and corporate governance on firm value: Evidence from the Amman Stock Exchange

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Abstract

Much effort has been expended by the regulators in Jordan to enhance the code of corporate governance (CG); however, the effectiveness of CG mechanisms in monitoring management and enhancing the value of a firm is still a puzzle. This study aims to investigate the impact of CG and cash holdings (CH) on firm value as measured by the market-to-book ratio. The sample consists of all manufacturing firms listed on the Amman Stock Exchange (ASE) over the years 2010–2017. The study hypotheses were tested using panel regression analysis. The research findings suggest that CH have a positive association with firm value, supporting the transaction and precautionary motives for holding cash. An interesting finding is that board expertise was found to be negatively associated with firm value. Gender diversity was found to be positively related to firm value, while board size, independence, and frequency of meetings were found to be insignificant. It seems that firms in Jordan regard strong CG mechanisms to be expensive and of little value in mitigating the negative effects of a weak legal system. These findings shed new light on the influence (or the lack of it) of boards in Jordanian firms. Consequently, the study recommends that the regulatory agencies in Jordan should consider improving governance codes and Rules to increase the effectiveness of the board and governance in general.

Keywords: Cash Holdings, Governance, Firm Value, Board of Directors, Market-to-Book Ratio

Authors’ individual contribution: Conceptualization — H.Z.J.; Methodology — H.Z.J. and A.A.A.; Formal Analysis — A.A.A.; Investigation — A.A.A.; Resources — H.Z.J. and S.A.A.; Writing — Original Draft — S.A.A.; Writing — Review & Editing — S.A.A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M40, M41, G30

Received: 14.07.2021
Accepted: 27.10.2021
Published online: 29.10.2021

How to cite this paper: Jaradat, H. Z., Alnaimi, A. A., & Alsmadi, S. A. (2021). The effect of cash holdings and corporate governance on firm value: Evidence from the Amman Stock Exchange [Special issue]. Journal of Governance & Regulation, 10(4), 272–281. https://doi.org/10.22495/jgrv10i4siart7