Governance structures, cash holdings and firm value on the Ghana Stock Exchange

• Pages: 671-685
• DOI: https://doi.org/10.1108/CG-07-2017-0148
• Date: 05 April 2018
• Published date: 05 April 2018
• Author: Disraeli Asante-Darko,Bright Adu Bonsu,Samuel Famiyeh,Amoako Kwarteng,Yayra Goka
• Subject Matter: Corporate governance,Strategy

Governance structures, cash holdings and

f‌irm value on the Ghana Stock Exchange

Disraeli Asante-Darko, Bright Adu Bonsu, Samuel Famiyeh, Amoako Kwarteng

and Yayra Goka

Abstract

Purpose –There is an existing relationshipamong 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 relationshipbetween corporate governance practices, ownershipstructure, cash

holdingsand firm value.

Design/methodology/approach –The study deployed the seemingly unrelated regression to reduce

the problem of multicollinearityresulting from the strong relationship between cash reserves and some

controlvariables.

Findings –The study found no significant relationship between board size and firm value. Similar

findings were also madeon the relationship between proportion of non-executivedirectors on the board

and firm value.However, firms audited by the big four auditfirms are valued higher by the capital market.

Cash holdings of firms negatively affect performance, and this is statistically significant. A positive

relationshiparises between a firm’s cash holdings andits value as a result of debt financing, even though

this is notsignificant.

Originality/value –The study is the first of its kindthat 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 debtfinancing and cash holdings on firm value in Ghana.

Keywords Ghana, Corporate governance, Firm value, Firm liquidity

Paper type Research paper

1. 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

Disraeli Asante-Darko is

Lecturer at the Ghana

Institute of Management

and Public Administration,

Achimota, Ghana.

Bright Adu Bonsu is based

at the Department of

Accounting and Finance,

Kwame Nkrumah University

of Science and Technology,

Kumasi, Ghana.

Samuel Famiyeh,

Amoako Kwarteng and

Yayra Goka are all based at

the Ghana Institute of

Management and Public

Administration, Achimota,

Ghana.

Received 18 July 2017

Revised 6 November 2017

16 January 2018

17 February 2018

Accepted 26 February 2018

DOI 10.1108/CG-07-2017-0148 VOL. 18 NO. 4 2018, pp. 671-685, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 671