Co-opted Boards and Corporate Cash Holdings

Abdul Ghafoor, Frank Li Zhichuan, Imran Yousaf

    Research output: Working paper


    We study the relationship between board co-option and corporate cash holdings. We find that as the fraction of co-opted board members (those appointed after a CEO assumes office) increases, firms opportunistically maintain higher cash holdings, indicating an agency problem of board co-option. The effect of gaining one co-opted board member is comparable, in magnitude and significance, to that of losing an independent board member. The agency problem of cash holdings arises once a board is co-opted, regardless of whether it is classified as independent based on conventional and legal definitions. We further discover that abnormal cash holdings under co-opted boards are driven by flexibility motives, but not precautionary motives. The positive effect of board co-option on cash is more pronounced in financially unconstrained firms and firms with high information asymmetry. In addition, board co-option leads to a significantly lower marginal value of cash and reduced dividend payouts. Finally, we find that alternative governance mechanisms, such as institutional ownership and analyst coverage, dampen the documented effects. We address the endogeneity problem with a variety of methods including exogenous events of CEO sudden deaths.
    Original languageEnglish
    PublisherCentre for Accountancy Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University
    Publication statusPublished (VoR) - 23 Feb 2024


    • Board co-option
    • board independence
    • cash holdings
    • agency problem
    • corporate governance


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