The Impact of Foreign Portfolio Investment and Corporate Governance on Corporate Cash Holdings: Evidence from the Leading Manufacturing Sectors in Pakistan

Abstract

Corporate governance plays a significant role in determining cash holdings of the corporation. The behavior of corporate manager in companies where the protection of rights of the shareholders is week leads to the problem of agency. The key aim of this study is to scrutinize the influence of foreign portfolio investment and corporate governance on corporate cash holdings. For analysis trade off theory, agency cost theory and Modern Theory of Portfolio are reviewed. The study is performed by taking 67 listed manufacturing firms in the Pakistan stock exchange for the period of 2013-2018.Chow test, Breusch-Pagan Lagrange Multiplier (LM) Test and Hausman specification test performed for data analysis. The results showed that FPI inflow has a significant and negative impact on cash holdings. In terms of corporate governance ownership concentration has a significant and negative impact on the cash holdings while board size significant and positive impact and board independence has an insignificant and positive impact on the cash holdings. This study concluded that corporate governance practices must be improved and made effective in such a way so as to attract and retain investment and also protect the shareholders rights and managers must perform in the best concern of the shareholders by investing cash in healthy projects to minimize the agency conflict.