Abstract

Purpose – There is an existing relationship among shareholders, boards of directors and management of companies. Corporate governance practices of companies are expected to ensure that this relationship maximises the wealth of shareholders. Differences exist among corporate governance of companies listed on the Ghana Stock Exchange. Companies, for purposes of liquidity, hold cash, but cash holdings also add to the cost of financing, according to working capital theories. The study, thus, sought to examine the relationship between corporate governance practices, ownership structure, cash holdings and firm value. Design/methodology/approach – The study deployed the seemingly unrelated regression to reduce the problem of multicollinearity resulting from the strong relationship between cash reserves and some control variables. Findings – The study found no significant relationship between board size and firm value. Similar findings were also made on the relationship between proportion of non-executive directors on the board and firm value. However, firms audited by the big four audit firms are valued higher by the capital market. Cash holdings of firms negatively affect performance, and this is statistically significant. A positive relationship arises between a firm’s cash holdings and its value as a result of debt financing, even though this is not significant. Originality/value – The study is the first of its kind that deploys Tobin’s Q as a measure of firms’ value to reflect investors’ valuation of firms in Ghana. The study is also the first of its kind to test the interactive effect of debt financing and cash holdings on firm value in Ghana.

Introduction

The value of a company is affected by factors within the control of management and other external factors. Valuation models identify the value of a company as a function of the risk faced by the company. Risk, in the literature, is identified as systematic and unsystematic risk, where systematic risk refers to risk arising from market-related factors, and unsystematic risk arises from entity-specific factors. Entity-specific factors, such as cash holding, corporate governance and ownership structure, can influence a company’s value (Harford et al., 2008). In valuation of equity shares, one approach identified in the literature is the free cash flow method, which values shares based on the free cash flow available. This means that the amount of cash a company holds at any point in time has influence on its value (Isshaq et al., 2009). Corporate governance, the mechanism within which a firm operates and is directed, can also influence its value. Jensen (1993) identified that as a result of the agency problem, the shareholder wealth maximisation goal, which managers are to pursue, is disregarded for personal goals, such as increasing their perks. This phenomenon is not value-adding. Eberhart (2012), in a research based in Japan, showed that companies that adopted the Anglo-American committee system experienced increase in their firm valuation after the adoption, and the reason stated was that the adoption signalled a move to transparency. With transparency, asymmetric agency cost was also expected to be reduced. Other researchers, such as Stiglbauer and Velte (2014), show that soft law regulations governing corporate governance have no impact on the value of firms. The effect of executive ownership on different economic variables has been assessed extensively in current literature (Iona et al., 2017; Iona and Leonida, 2016; Ehikioya, 2009).