Director Network And Corporate Cash Policy

Previous literature has shown that market imperfections and information asymmetry problem results in a disparity between external and internal cost of finance,thereby limiting firm's capability to finance investment opportunities.Hence,firms become financially constrained and would be forced to manage their cash flows by sacrificing ciurrent investment project for future gainful projects.A related stream of research documents that financially constrained firms have a high tendency to keep enough cash hence,they exhibit a higher cash flow sensitivity of cash.I examine the impact of director network on corporate cash policy by laying emphasis on how director network affects the sensitivity of firms',cash holdings to their cash flows.Using the S&P 1500 firms covering 1,654 firms and 11,729 firm-year observations for the period of 1998-2013,I find strong evidence that the cash flow sensitivity to cash flows decreases with director network.In other words,firms with well-connected directors do not need to save more cash.I further considered another implication of firms' propensity to save cash with respect to firm size and find that the negative relationship holds irrespective of the firm size.Lastly,I find strong evidence that the value of cash reduces with well-connected directors.In general,I provide evidence on the role of director network on cash flow sensitivity of cash and value of cash holdings.