Empirical study about the effect of information asymmetry and governance on corporate excess cash holdings

Abstract

This study examines the interactive effect of information asymmetry and governance on corporate excess cash holdings. To investigate the interactive effect, I perform three tests: the effect of information asymmetry on excess cash level, the effect of governance on excess cash level, and effect of information asymmetry and governance on corporate excess cash level. I find that firms under greater information asymmetry hold more excess cash reserves, and firms with stronger governance structure also accumulate excess cash reserves. Lastly, the combination of information asymmetry and governance structure is negatively associated with excess cash level. The results imply that well-monitored managers resolve a bit information asymmetry, and in turn, indirectly hold less excess cash holdings than with unmonitored managers given greater information asymmetry situation.