The impact of cash holdings on firm financial performance: the moderating role of governance

Abstract

This study examines the relationship between corporate cash holdings and firm financial performance in the ASEAN-5 countries (Thailand, Singapore, Malaysia, Indonesia, and the Philippines) over the period 2020–2024, covering the COVID-19 pandemic. Using panel regression with firm-, year-, and country-fixed effects and standard errors clustered at the firm level, the main results show that the cash ratio is positively and statistically significantly associated with all three performance measures (Tobin's Q, ROA, and net profit margin). This positive relationship is robust to an alternative cash measure (the natural logarithm of one plus cash), indicating that, on average, firms with high cash holdings do not destroy shareholder value; rather, the finding is consistent with a precautionary view of cash reserves under emerging-market uncertainty. Regarding the moderating role of governance quality (proxied by the LSEG Governance pillar score), the interaction between cash and the aggregate governance score is statistically insignificant across all measures, likely reflecting limited within-firm variation in the score over the five-year window. However, country-by-country analysis reveals clear differences: Indonesia shows a significant positive effect on ROA, whereas Singapore shows a significant negative effect on the same measure—consistent with trade-off theory, under which the marginal value of cash depends on a firm's joint position on the cash–governance relationship. The findings carry implications for three stakeholder groups: investors (high cash does not, on average, erode value), managers (well-governed, cash-rich firms may face diminishing marginal returns to additional cash, unlike weakly-governed, cash-poor firms that still benefit from reserves), and policymakers/regulators (reinforcing the importance of country-level institutional context and continued investment in disclosure and governance enforcement).