Antecedents and Consequence of Corporate Cash Holdings

Abstract

One of the prevailing issues of corporate governance in emerging economies is the principal-principal (PP) conflict, which refers to the conflict between two principals—minority shareholders and majority shareholders. The tension between the principals directly relates to the controlling rights of the firm’s strategic decisions. Therefore, this study aims to investigate the indirect effect of the principal-principal (PP) conflict on firm performance through cash holding and determine how institutional ownership levels moderate this relation. This study used a novel methodology, i.e., PROCESS MACRO, developed by Andrew F. Hayes for moderated-mediation estimation and multiple-liner regression with year and industry dummies. A sample of 230 non-financial firms listed on Pakistan Stock was taken from 2013 to 2021. The results show a positive association between PP conflict-cash holding and cash holding-firm performance, adversely affecting the performance by hoarding cash. The indirect bootstrapping effect for the low, middle, and high institutional ownership levels was also significant. The controlling owners take away the rights of minority shareholders by hoarding extra reserves, but institutional shareholders moderate this relationship and help improve the firm performance. Our study contributes to the extant research on principal–principal conflicts in emerging economies. We advance the debate on the complexity of relationships between inside and outside shareholders. Our findings demonstrate that understanding controlling and minority shareholders and institutional conditions provides a more fine-grained understanding of the complexity of principal–principal conflicts.