Cash holdings and corporate governance: theory and contrary evidence from hotel firms

The purpose of this study is to examine the extent to which the quality of corporate governance mechanisms and growth opportunities affect agency problems in hotel firms.

The effects of cash flows on investments and cash holdings were analyzed using three-stage least square analysis to determine the extent to which agency problems are due to the quality of corporate governance in hotel firms.

The findings showed that the effects of cash flows on investments and cash holdings were greater in well-governed hotel firms than in poorly governed hotel firms. These effects were also greater in low-growth hotel firms than in high-growth hotel firms. However, the results from a concurrent examination of the quality of corporate governance and growth opportunities showed that poorly governed hotel firms with low-growth opportunities are exposed to agency problems.

These results suggest that neither corporate governance mechanisms nor growth opportunities alone indicate agency problems. Theoretical implications are discussed within the realms of free cash flow theory and growth hypothesis.

High-growth hotel firms should retain all of their cash and cash flows to undertake value-increasing projects when they become available. Shareholders’ wealth is more likely to be maximized in high-growth firms regardless of the quality of corporate governance.

Although various aspects of corporate governance have been investigated in hospitality literature, previous studies did not examine the concurrent effects of corporate governance and growth opportunities on agency problems.