Does the board of directors affect cash holdings? A study of French listed firms

Prior studies show that agency conflicts are important in explaining corporate financial policies and that the board of directors is central to corporate governance. In this study, we examine the role of this governing body in the accumulation of cash reserves. Using a sample of 597 French listed firms during 2001–2007, we find that firms with boards deemed to be effective in mitigating agency problems—that is, those appointing independent directors and splitting chief executive officer and chair positions—accumulate less cash reserves than those with less effective boards. Moreover, two-tier boards are more efficient in mitigating the agency costs of free cash flow, leading to less corporate cash hoarding. These findings support the idea that agency conflicts influence cash management policy and that effective boards of directors play an important disciplinary role in a concentrated ownership setting.