Internal Control Quality, Board Independence & Value of Corporate Cash Holdings: Evidence from India

Abstract

The study explores the influence of regulation on reporting of internal control quality on relationship between corporate cash holdings and market value of equity. Furthermore, it explores whether the role of independent directors has become more effective in improving market value of equity following these regulations on internal control quality.  A sample of BSE 500 index companies has been selected which are listed on Bombay Stock Exchange (BSE) for three years period such as 2012, 2014 and 2016. Variables such as internal control quality have been measured as indicator variable while presence of independent director has been measured as ratio of independent directors to total directors. Fama and French model of 1998 has been used in order to check the effect of cash holdings on market value of equity. Results of descriptive statistics report that market value of equity has been higher in post Companies Act period as compared to pre Companies Act period. Whereas regression analysis results report that regulations of reporting on internal control quality have significant positive effect on relationship between cash holdings and market value of equity. Finally,the role of independent directors has become more effective in improving market value of equity following the enactment of Companies Act 2013. It can be inferred that these regulations of reporting on internal control quality are quite effective in preventing management from expropriation of cash resources. Furthermore, these results have also improved the monitoring role of independent directors in protecting shareholders wealth and thus resolving agency problems.