Do board networks matter for corporate cash holdings? Evidence from Australian firms

Abstract

Purpose

In today’s interconnected world, social capital has emerged as a crucial business competence, drawing significant attention in recent literature. Using social network analysis, this study aims to investigate the impact of network centrality, established by a firm through its board members (i.e. boardroom networks), on corporate cash holdings.

Design/methodology/approach

This study uses extensive panel data comprising 36,963 firm-year observations of firms listed on the Australian Securities Exchange, spanning a 22-year period (2001–2022). The study uses firm fixed-effect regression along with several alternative specifications and an instrumental variable approach to ensure the robustness of the results. Boardroom network centrality is quantified by five measures that capture different perspectives on networks as viable conduits for resource exchange and information flow: degree, two-step reach, closeness, eigenvector and betweenness.

Findings

The authors find evidence for the benefits of board networks. Firms with well-connected boards (central firms) are more likely to have smaller cash holdings. The findings also reveal distinct effects stemming from local and global properties of centrality, with local network measures playing a more pronounced role in shaping cash-holding decisions. Overall, the evidence reflects the ability of connected directors to enhance governance by limiting managerial discretion over cash reserves, thus reducing agency conflicts associated with cash holdings.

Research limitations/implications

This study offers important insights for regulators, investors and practitioners, highlighting the potential for connected directors to effectively curtail managerial autonomy in deploying corporate cash holdings.

Originality/value

This study contributes to the ongoing discussion about the advantages and drawbacks of board networks, which constitute a vibrant and burgeoning area of research in the finance literature. It also complements scanty network-based studies on firm cash holdings. Importantly, this study extends prior work by providing robust evidence and a comprehensive analysis of the nuanced roles that board networks play in affecting the level of cash reserves.

Citation

Rumokoy, L.J., Liu, B. and Chung, R. (2024), "Do board networks matter for corporate cash holdings? Evidence from Australian firms", Corporate Governance, Vol. 24 No. 7, pp. 1695-1723. https://doi.org/10.1108/CG-05-2023-0216