Corporate governance in simultaneous modeling of cash holdings and leverage

This study investigates the simultaneity of cash holdings and leverage decisions in the presence of ownership and board structures using all listed companies in the Main Market of Bursa Malaysia over a three-year period from 2008 to 2010. Five measures of ownership structures are identified: family, business group, foreign, private domestic institutional investors, government link investment companies
(GLICs), and state. Four characteristics of board of directors are specified: board size, board independence, managerial ownership, and CEO duality. The study opted for two stage least squares (2SLS) to estimate the regression models. This is among the earlier studies in Malaysia to consider simultaneity of cash holdings and leverage decisions using 2SLS as an estimation technique. The result showed cash holdings and leverage affect each other negatively. Business group, foreign ownership, board size and CEO duality affect cash holdings and leverage positively while state affects
cash holdings and leverage negatively. However, private domestic institutional investors only affect cash holdings positively while GLICs have a positive relationship with leverage. The results did not change when three stage least squares (3SLS) method was used. The major contributions of this study are one, the
consideration of both leverage and cash holdings decisions must be done simultaneously and two, policy makers should focus on improving board independence to better protect minority shareholders as this will enhance investors’ confidence to invest in a concentrated ownership environment such as Malaysia