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Do political connections shape the Board

attributes and
nexus between board attributes corporate cash
holdings
and corporate cash holdings?
Sara T.F. Abuhijleh and Mohammad A.A. Zaid
Faculty of Business and Economics, Palestine Technical University–Kadoorie,
Ramallah, Palestine Received 24 September 2021
Revised 5 December 2021
7 January 2022
Accepted 14 January 2022
Abstract
Purpose – Motivated by the agency theory, this paper primarily intends to empirically investigate the impact
of board attributes on corporate cash holdings and how the mentioned nexus is moderated by the level of
corporate political connections in a developing country, namely, Palestine during the period of 2011–2018.
Design/methodology/approach – Multiple regression analysis on a panel data was employed. Moreover,
the authors applied three different approaches of static panel data “pooled OLS, fixed effect and random effect”.
Fixed-effects estimator was selected as the optimal and most appropriate model. In addition, to control for the
potential endogeneity problem and to profoundly analyze the study data, the authors perform the one-step
system generalized method of moment estimator.
Findings – The results of this study provide support for the agency theory ideology, which considers that
sturdy and well-established corporate governance (CG) paradigms minify the magnitude of cash held by
companies. Furthermore, the findings distinctly unveil that the impact of board attributes is more positive
under a high level of political connections.
Research limitations/implications – This study was solely restricted to one institutional context
“Palestine”; therefore, the results reflect the attributes of the Palestinian business environment. In this vein, it is
possible to generate different findings in other countries, particularly in developed markets.
Practical implications – The findings of this study can draw responsible parties, top management and
policymakers’ attention in developing countries to introduce and contextualize new mechanisms that can lead
to better managing of corporate cash holdings.
Originality/value – Empirical evidence on the moderating role of political connection on the effect of board
attributes on corporate cash holdings something that was predominantly neglected by the earlier research and
has not yet examined by ancestors. Hence, to protrude nuanced understanding of this novel idea, this study
minutely bridges this research gap and contributes practically and theoretically to the existing CG–cash
holdings literature.
Keywords Corporate cash holdings, Board attributes, Political connections, Corporate governance,
Agency theory, GMM
Paper type Research paper

1. Introduction
Over recent years, there was a globally outstanding increase in corporate cash holdings
literature (Boubaker et al., 2015). Indubitably, cash is the lifeblood of companies to accomplish
their operating, investing and financing activities (Hassanein and Kokel, 2019). In this vein, a
vast array of preceding literature emphasizes that there are several reasons for holding cash.
For instance, according to Bates et al. (2009), there are four main motives for firms to keep the
cash. In the first place, entities need money for operational or transactional motives. The
operational motives refer to the cash required by firms to meet their day-to-day business
operations (Keynes, 2018). The second reason for companies to hold cash is for precautionary
motives. Under such situation, firms hold money to ascertain that they will be allowed to
maintain sufficient cash when outside funds are costly (Ferreira and Vilela, 2004). Third, from

The authors would like to express their sincere appreciation and thanks to the Palestine Technical EuroMed Journal of Business
University–Kadoorie (PTUK) for supporting this research. © Emerald Publishing Limited
1450-2194
Declaration of competing interest: The authors declare that they have no conflict of interest. DOI 10.1108/EMJB-09-2021-0136
EMJB a tax point of view, Foley et al. (2007) pinpoints and elucidates the tax motive for holding cash.
As a matter of fact, the tax burden creates motives for firms to preserve income and keep it as
cash. The last and most crucial reason for the phenomenon of holding cash is the agency
motive. Within this scope, Jensen (1986) argues that during periods with poor investment
opportunities, self-interest managers desire to retain cash at the expense of distributing it in
the form of dividends to shareholders. In the same context, Dittmar and Mahrt-Smith (2007)
provide a clear of evidence suggesting that cash is worthless when the agency conflict arises
between managers and shareholders.
Nevertheless, holding large amounts of cash within the company can lead to the
misappropriation of firm’s resources by management. The underlying logic behind this
argument is that executive managers have direct access to firm’s liquid assets (Boubaker
et al., 2015). In this direction, Fama and Jensen (1983) cast a great light onto the indispensable
and intrinsic role of the internal governance mechanisms in restricting the abuse of the firm’s
resources. In particular, the effectiveness of board of directors is deemed as an essential factor
in ameliorating the surveillance level on the executive management’s actions.
Given the aforementioned argument, the agency theory assumes that the increases in
shareholders wealth derive to a great extent from a strong control by the board members.
Thereby, the effectiveness of the board is evaluated by its ability to align the interests of
the principal-agent relationship (Meckling and Jensen, 1976). Since the board of directors
has easy accessibility to the firm’s management strategic information, board members can
adequately and conveniently reinforce the management of the cash holdings (Kim et al., 2007).
According to the previous discussion, a conclusion can be drawn that without proper
corporate governance (CG) mechanisms, it is barely to prevent the entrenched managers from
the exploitation of cash reserves. Consequently, there is a substantial reason to practically
investigate how board characteristics affect the level of corporate cash holdings. Given the
aforesaid discussion, we build our first argument that board attributes may play a strikingly
role in shaping the volume of companies’ cash holdings.
Moreover, the crushing majority of the contemporary preceding research have
conspicuously manifested that in the presence of politically connected top officers, the
level of cash holdings maintained by companies will be increased (see Dittmar and Mahrt-
Smith, 2003; Kalcheva and Lins, 2007; Kusnadi and Wei, 2012). In this sense, the second
argument of this study was built as the board of directors’ characteristics are more likely to
affect corporate cash holdings under the presence of “political connections”.
This study makes remarkable contributions and provides theoretical and empirical
insights to the existing knowledge from three aspects. First, to the best of our knowledge,
this is the only empirical research that examines the moderating effect of political
connections on the relation between board characteristics and corporate cash holdings. In
the literal sense of word, the overwhelming majority of prior studies are devoted to examine
the direct nexus between CG and firm’s cash holdings. Thereby, it is worth to study what
was predominantly neglected by the previous researchers (see Cruz, 2015; Hassanein and
Kokel, 2019; Kengatharan, 2017; Roy, 2018). Second, in the context of the contradictory and
mixed findings in prior research, it is logically and rationally to revisit the above-mentioned
relationship by including a moderator variable. Therefore, the findings of this empirical
study extend the current debate and offer new evidence from a developing country and
specifically from an Arab nation, which, in turn, help to bridge the void in the existing CG–
cash holdings literature. Third, the more recent empirical studies presented by ancestors
denote that there is insufficient literature about the association between CG and corporate
cash holdings and the investigations on this issue have not yet well-researched (Al-Najjar,
2013). Ultimately, the literature on the nexus between corporate cash holdings and CG
practices in Arab countries is hugely minimal and at its infancy. Hence, the time is right to
provide an overarching view and to corroborate the intimate link between board attributes Board
and firm cash holdings. attributes and
In light of the foregoing, this study primarily purposes to pursue these principal
objectives: Firstly, to analyze the nexus between board attributes “board size, board
corporate cash
independence, CEO duality, and board meeting” and corporate cash holdings; and Secondly, holdings
to examine if the effect of board effectiveness on corporate cash holdings is contingent on
political connections.
To achieve these key objectives, we construct a panel data set of the non-financial listed
firms on the Palestine Stock Exchange (PEX). The primary motivation for choosing Palestine
for this empirical study emanates from the unique business environment in Palestine, since it
has been characterized by level of political uncertainty and economic instability (Zaid et al.,
2019). In this context, it is worthwhile to explore the nexus between board attribute and
corporate cash holdings from countries affected by socio-political instability.
The empirical results unveil that well-established CG paradigms erode the magnitude of
cash held by companies. Furthermore, the findings contend that the effect of board attributes
on corporate cash holdings turn from negative to positive under a high level of political
connections. In this vein, a conclusion can be drawn that firms with a high proportion of
political connections affect the level of corporate cash holdings in a positive manner.
The remainder of this paper is structured as follows: The subsequent section presents the
previous literature. Afterwards, we illustrate the theoretical framework and hypotheses
development. Next, we discuss the methodological approach applied, in terms of sample and
data collection, variables definitions and model specification. The next section shows the
empirical results, robustness checks and discussion. The conclusions, limitations and
recommendations are presented in the last section.

2. Literature review
A large number of studies has been performed to investigate the determinants of corporate
cash holdings (see Al-Najjar, 2013; Bigelli and Sanchez-Vidal, 2012; Gao et al., 2013;
Subramaniam et al., 2011; Shah et al., 2021). In this sense, over the last decade, examining the
impact of CG practices on the level of cash holdings has been drawn a significant attention
(Ferkins et al., 2018; Soobaroyen et al., 2017). For instance, Chen and Chuang (2009)
empirically find that independent directors play a crucial role in the firm’s cash policy. More
importantly, shareholders accept higher levels of cash holdings if they assure that the nature
of the firm’s board composition can protect their interests.
Gill and Shah (2012) point out that larger board size and CEO duality increase the amount
of cash holdings. Similarly, Kuan et al. (2012) argue that the objective of CG is to ensure that
firms hold low levels of cash to avoid agency problems. More recently, a study conducted by
Boubaker et al. (2015) unveil that firms with effective boards keep lower levels of cash than
those with less effective boards. This result approves the notion that agency conflicts
between shareholders and managers have a significant impact on cash management policy.
Similarly, in normal periods, in line with agency theory, a vigilant boardroom characterized
by a high percentage of independent directors constricts cash holdings activities. Beyond
that, the effects of the board of directors’ attributes are contingent on a firm’s external
environment (Cambrea et al., 2021).
In the opposite direction, Sheikh and Khan (2015) contend that board characteristics such
as board size, board independence and CEO duality are positively associated with cash
holdings. The authors, therefore, conclude that board attributes are deemed as significant
predictors of firm’s cash holdings.
According to Hsu et al. (2015), the frequency of board meetings leads to lower levels of cash
holdings. Additionally, the results show that oversized boards are associated with higher
EMJB levels of cash holdings. This finding supports the notion that large board is less likely to
effectively control and restrict managers from holding large amounts of cash. Another recent
study conducted by Roy (2018) investigates the impact of board attributes on cash holdings
in the context of the emerging economy. The author reports that firms with effective board
characteristics incline to mitigate cash balances. Likewise, Hassanein and Kokel (2019) find
that smaller boards of directors hold lower levels of corporate cash. Additionally, they report
that the frequency of board meetings has an insignificant impact on the level of corporate
cash holdings.
Although a vast array of prior research has primarily shed light on the nexus between CG
and corporate cash holdings in developing countries, efforts on this area are still relatively
low in Arab World. More specifically, literature in Palestine has not yet well-examined the
nexus between CG and corporate cash holdings. Hence, Palestine still lacks a lot of research in
this regard.
Moving to the firm’s political connections, prior literature demonstrates that this
phenomenon can be considered a useful device to enhance firms’ cash policy (Ullah and
Kamal, 2017). Despite that, researchers have reported different points of view about the
impact of the presence of politically connected top officers on corporate cash holdings. Some
scholars have indicated that political connections have a positive relationship with cash
holdings. For example, Boubakri et al. (2013) find that politically connected firms hold more
cash for two reasons. First, politicians generally pursue their political objectives at the
expense of the firm’s stockholders. Second, political connections lead to agency problems. In
this vein, excessive cash holdings are very harmful to shareholders because these
inefficiently high levels of cash could be invested in profitable projects to maximize
shareholders wealth.
Similarly, Lin et al. (2019) identify a positive link between political connections and cash
holdings. According to the authors, the plausible logic behind this positive relationship can be
attributed to the existence of politically connected managers. More precisely, the presence of
politically connected managers generates a solid association between the dominance over
liquid assets with the possession of power. Therefore, this signifies that these managers tend
to waste firm’s cash to achieve their personal interests. Another study conducted by Boubakri
et al. (2012) articulate that politically connected firms are more likely to hold large cash
balances. Saeed et al. (2014) analyze the principal motives stand behind corporate cash
holdings with a tremendous concentration on the impact of political connections. The authors
affirm that firms with high level of political connections are more likely to hold superfluous
cash and this phenomenon is more noticeable in countries with a dictatorial system.
In the Chinese context, Chang et al. (2021) articulate that politically connected companies
increase their cash holdings more than their non-connected firms’ counterparts, particularly
when firms rely heavily on the government for external resources. In the same direction,
Xiong et al. (2021) unveil that political connections mitigate the cost and likelihood of being
illiquid for state-owned firms, as these connections have the power to guarantee the easier
access to capital and stabilize future cash flows.
In contrast to the above, a voluminous literature has contends that the presence of political
connections leads to lower the levels of cash holdings. For instance, Hill et al. (2014) provide
evidence indicating that corporate cash holdings are influenced by the connectedness of firms
to the government bodies. Using lobbying expenditures to measure political connections,
they articulate that the presence of extensive political affiliations significantly decreases
corporate cash holdings. Thereby, this finding emphasizes that companies react optimally to
the advantages given by political connections through keeping lower levels of cash. In the
same direction, Opler et al. (1999) point out that firms which enjoy easy access to financial
institutions such politically connected firms incline to keep lower levels of cash than their
non-connected enterprises counterparts.
 In summary, the argument for the positive nexus between politically connected firms and Board
corporate cash holdings is that generally, top officers who are politicians follow their political attributes and
objectives that may disagree with shareholders’ wealth maximization objectives. Conversely,
the underlying logic behind the negative influence of political connections on firm cash
corporate cash
holding is that politically connected firms have easy access to borrow funds and take holdings
advantage of a soft budget constraint.

3. Theoretical framework and hypotheses development

3.1 Theoretical framework
The growth in awareness of corporate cash holdings and CG mechanism prompts the
accounting scholars to articulate the most relevant theoretical perspectives on the nexus
between board attributes and cash holdings. In light of this, the concept of corporate
disclosure is consistent with manifold and multifarious theories including but not limited to
agency theory, trade-off theory and pecking order theory. Notwithstanding, after surveying
the cash holding literature, the findings indicate that agency theory is one of the most adopted
theory to clarify the management’s incentive to hold cash. In this context, a vast array of prior
studies has employed the agency theory to illustrate the relationship between CG practices
and corporate cash holdings (da Cruz et al., 2019; Hassanein and Kokel, 2019; Xu et al., 2019;
Xiong et al., 2021). More importantly, we adopt this theory because the idea of CG mechanism
originated from agency theory.
In more precise language, agency theory sheds great light on two sensitive issues that can
occur in the agency relationships. The first problem (1) may arise when the desires or goals of
the principal (shareholders) and agent (managers) are incompatible. The second issue (2) is
called risk-sharing that arises when the principal and agent have distinct perspectives
toward risk (Eisenhardt, 1989). Given the above discussion, the critical point of this theory is
to determine the optimal contract organizing the principle-agent relationship in order to
reduce the agency-principal conflicts (Fama and Jensen, 1983b).
Given the explanation mentioned above, agency theory implies that entrenched managers
prefer to hold cash rather than distribute dividends to owners (Jensen, 1986). Under such
circumstances, a potential conflict of interest (agency problem) arises because keeping high
levels of cash might not the best option for shareholders. The plausible reason behind this
sensitive argument is that firms with large amounts of cash are more likely to have higher
agency cost as a result of the existence divergence in goals and desires between managers
and shareholders. Therefore, Ferreira and Vilela (2004) imply that entities are in need to
understand the agency philosophy to find out the optimal and superior amount of cash that
can maximize shareholder wealth and minimize agency costs.
From an agency ideology, the conflict of interest between shareholders (principals) and
managers (agents) arises when managers run the company on behalf of owners and act to
maximize their individual benefits rather than the shareholders’ wealth (Jensen, 1986). In the
regard, managers aim to control all corporate resources in order to satisfy their personal
gains. One of these resources is the cash reserve (Nhan, 2018). Consequently, a board of
directors should maintain specific attributes concerning their structure and composition to
perform their roles properly and mitigate these agency problem (Harford et al., 2012).
In light of superior CG mechanisms, the board of directors plays a critical role in curbing
executive manager on behalf of outside shareholders, which, in prevents managers from use
this superfluous by alleviating the available amount of cash in their hands, and hence
inducing them to act in the best interest of shareholders. A conclusion can be drawn that
agency cost is likely to be exacerbated in the existence of high level of cash in hands.
In addition to the points mentioned above, top officers in developing countries are
characterized by being politically connected. This political engagement, therefore, may
EMJB impact significantly on corporate cash policy (Megginson et al., 2014; Tihanyi et al., 2019).
Nonetheless, the understanding of how top officers’ politically connected influence corporate
cash holdings remains limited and marked by contradictory findings. Given the above
arguments, this study predicts that the presence of political connections moderates the
relationship between board characteristics and corporate cash holdings.

3.2 Hypotheses development

3.2.1 Board size. Board size is deemed one of the most vital dimensions of CG regime in
overseeing whether an entity’s activities are appropriately managed by their agents.
Previous literature has considered board size an essential factor of CG effectiveness (see,
Alzurqan and Al_Sufy, 2011; Dalton et al., 1999; Gill and Shah, 2012; Jensen, 1993). Moreover,
Cheng et al. (2008) indicate that the importance of board size is well identified in CG research.
In this regard, the ability of the board members to make the best decisions and the quality of
discussions among members are affected by board size (Lawal, 2012).
Additionally, Chaganti et al. (1985), Dallas (2001) and Dalton et al. (1998) believe that
bigger boards can improve the quality of decision-making because a large group of members
can provide more diversity of expertise and skills than their smaller count parts. In the same
direction, Chouaibi et al. (2021b) articulate that large board size offers diversity in terms of
financial expertise.
Jackling and Johl (2009) reveal that large boards are characterized by greater depth of
intelligence and awareness, which improve the quality of strategic decisions. Consequently,
large boards are more likely to provide adequate monitoring over the firm’s financing
decisions, which will be reflected in keeping low levels of cash holdings (Al-Najjar and Clark,
2017). Consistence with the agency theory, we argue that the larger size of boardroom is more
likely to be vigilant and prudent over the detrimental managers’ actions, and therefore, firms
with a large board size have the ability to restrict the level of cash in hand. Based on the
empirical literature reviewed above and the theoretical arguments, the first hypothesis can be
formulated as follows:
H1. There is a negative relationship between board size and the level of corporate cash
holdings.
3.2.2 Board independence. From the agency theory ideology, boardroom with a high
proportion of independent directors is presumed to be more efficacious in overseeing managers
to meet the best interests of owners. Ahmed and Gabor (2012) assert that board independence
is an essential attribute of CG. The authors also argued that companies should find the balance
between inside and outside directors in their boards. Moreover, board independence is a
requisite factor in shaping the board effectiveness. Prior scholarly articles have identified that
boards with high percentages of non-executive directors may assist in mitigating the agency
conflict by controlling and preventing the opportunistic behavior of managers (Baysinger
and Hoskisson, 1990; William and Michael, 1976). Accordingly, independent board members
are more likely to perform the monitoring duty over the firm’s actions in an effective manner
than executive board members (Akhtar et al., 2018; Langevoort, 2000).
A vast array of preceding research has emphasized that independent board members are
more able to protect the rights of non-controlling shareholders (Clout et al., 2013).
Furthermore, non-executive directors are more objective in terms of financial issues,
particularly board remunerations (Adams et al., 2010). Given the aforesaid discussion, the
high level of effectual monitoring functions of independent board over executive managers
leads to reduce the level of corporate cash holdings (Hassanein and Kokel, 2019). Thus, board
independence is considered an intrinsic factor in reducing the agency problem through its
inverse influence on corporate cash holdings (Akhtar et al., 2018).
 Empirically, stream of prior studies have articulated a negative link between board Board
independence and corporate cash holdings (e.g. Boubaker et al., 2015; Hassanein and attributes and
Kokel, 2019; Lee and Lee, 2009). Considering the arguments the agency philosophy, high
levels of cash holdings lead to an increase of opportunistic behavior. In this vein, companies
corporate cash
with high proportions of independent board members are supposed to hold lower cash holdings
amounts. Hence, following the agency theory, we outline our second hypothesis on board
independence as follows:
H2. There is a negative relationship between board independence and the level of
corporate cash holdings.
3.2.3 CEO duality. Role duality phenomenon occurs when the same person serves as CEO and
chairman at the same time. In such situation, combining the CEO and chairman expands the
risk of abusing the power and making distorted decisions with regard to corporate cash
holdings. From an agency theory standpoint, it is pivotal to separate the roles of CEO and
chairman to protect the interests of shareholders and hence mitigate the agency cost (Brickley
et al., 1997). The CEO duality has been criticized and considered an inappropriate practice for
companies to conduct their operations. For instance, Kholeif (2008) contends that the CEO
usually has more confidential information than shareholders, which leads to a problem
known as a moral hazard problem. To put it briefly, this kind of problem occurs because it is
difficult for shareholders to determine the accurate degree of managerial efforts.
Unfortunately, the moral hazard problem is exaggerated in the case of CEO duality. Thus,
it can be concluded that the board’s monitoring activity is strengthened when the roles of
CEO and chairman are undertaken by different individuals (Renneboog, 2000).
Concerning corporate cash holdings, Hassanein and Kokel (2019) denote that when the
same person performs both the CEO and the chairman positions, the rest of board members
could not control the opportunistic behavior of managers on cash holdings. Furthermore,
CEO duality promotes entrenched managers to keep substantial levels of cash for their
personal benefits, which positively affects the relationship between CEO duality and
corporate cash holdings (Boubakri et al., 2013). Empirically, there is strong evidence about the
positive nexus between CEO duality and the levels of cash holdings (e.g. Boubaker et al., 2015;
Hassanein and Kokel, 2019; Nhan, 2018). In the same context, Lee and Lee (2009) emphasize
that the separation between the chairman and the CEO results in reducing the excessive
amounts of cash held by corporations.
Congruent with the agency theory, we believe that existence of role duality in a firm
negatively impacts the performance level of monitoring actions, thereby maximizing the
corporate cash holdings. The third hypothesis can be postulated as follows:
H3. There is a positive relationship between CEO duality and the level of corporate cash
holdings.
3.2.4 Board meetings. The agency theory believes that the board of directors has as a
responsibility to monitor the performance of managers to ensure that the interests of
managers are aligned with shareholders’ interests (Fresard and Salva, 2010). According to Al-
Yahyaee and Al-Hadi (2016), the monitoring process is strengthened with the increasing
number of board meetings because they guarantee that the board members are effectively
performing their oversight role. In the same direction, Alshirah et al. (2020) argue that
effective board’ meetings are more likely to have control on the financial reporting processes.
Moreover, Vafeas (1999) unveils that board activity is an indispensable board characteristic
that can help in avoiding the opportunistic behavior of managers.
Numerous studies showcase that the frequency of meetings by the board could be
considered as a measure of the board effectiveness in implementing its monitoring role (e.g.
Garcıa-Ramos and Garcıa-Olalla, 2011). In a general sense, managers and shareholders
EMJB have different tendencies to benefit from cash. On the one hand, managers want to keep
substantial amounts of cash to invest them for their own purposes. On the flip side,
shareholders claim these amounts of cash in the form of dividends (Manoel et al., 2018).
Given the above discussion, it is supposed that the frequency of board meetings has a
positive impact on the quality of monitoring over management, which results in low levels
of corporate cash holdings. Likewise, Hsu et al. (2015) argue that when a board of directors
expend more time to monitor insider managers, the board are more able to prevent
managers from the accumulation of firm’s cash holdings, which leads to reduce the agency
problems.
Although there is a general consensus that board meetings reinforce the ability to monitor
managers, however, there is a noticeable lack of empirical research that investigate the
impact of the frequency of board meetings on the level of corporate cash holdings. In this vein,
a conclusion can be drawn that the level of cash holdings is affected by board effectiveness in
adverse manner, and this effectiveness increases with the frequency of board meetings.
Accordingly, the fourth hypothesis can be formulated as follows:
H4. There is a negative relationship between board meetings and the level of corporate
cash holdings.
3.2.5 The moderating effect of political connections. In more recent times, it has been
acknowledged that the presence of political connections in the firms is an issue garnering a
significant amount of attention among the researchers. Dittmar et al. (2003) propose that
politically connected companies are motivated to hold large cash amounts, even though their
managers can obtain funds quickly from external parties. Similarly, Leuz and Oberholzer-Gee
(2006) report that politically connected enterprises might have easier access to external
financing with preferential terms than similar non-connected firms. Nevertheless, these
connected firms may provide accounting reports with poor and sketchy quality. As a
consequence, agency theory speculates that there is a positive relationship between political
connections and corporate cash holdings (Kusnadi and Wei, 2012).
Furthermore, the empirical findings from the earlier studies show that top officers of
politically connected companies are more entrenched. This issue leads these connected
companies to suffer from more serious and severe agency conflicts (see, Cao et al., 2011;
Chaney et al., 2011; Morck et al., 2005; Qian et al., 2011). Consequently, according to the agency
motive of cash holdings, the top officers of politically connected firms tend to hold higher
levels of cash amounts (Dittmar et al., 2003; Kalcheva and Lins, 2007). Moreover, the positive
nexus between political connections and corporate cash holdings is more likely to be
significant in developing countries.
Drawing on the arguments above-stated, we theorize that the presence of political
connections in the firm may play a pivotal role in restraining the effectiveness of boardroom
to keep high level of cash. Thereby, firm’s cash-related strategies will be in favor of political
connections. Congruent with the agency theory, we develop the following hypotheses.
H5a. The moderating role of political connections on board size has a positive impact on
corporate cash holdings.
H5b. The moderating role of political connections on board independence has a positive
impact on corporate cash holdings.
H5c. The presence of political connections strengthens the positive relationship between
CEO duality and corporate cash holdings.
H5d. The moderating role of political connections on board meetings has a positive
impact on corporate cash holdings.
Based on the aforesaid discussion, our research argues that the nexus between board Board
characteristics and corporate cash holdings is shaped by the presence of political connections, attributes and
as shown in Figure 1.
corporate cash
holdings
4. Research design and methodology
4.1 Sample and data collection
Data on study variables were obtained from the companies’ annual reports listed on the
Palestine Stock Exchange (PEX). The research sample covered a period of eight years, from
2011 to 2018. The entrenched logic behind the selection of these years was motivated by the
followings two points: (1) this study uses the Code of CG in Palestine (2009) as a reference for
CG variables, this means that there was a growing interest in CG mechanisms during this
period among policymakers in Palestine (Qubbaja, 2018). Thus, it would be possible to collect
rich CG data and (2) the availability of the data over this study period.
To develop our sample, we extracted the data solely for non-financial companies listed
on the (PEX). Based on the PEX, the non-financial listed firms are classified into three core
groups, services, industry and investment. PEX has adopted the IFRSs as a mandatory
requirement for all listed companies since 2005. The financial entities are excluded from
the study sample due to the remarkable differences in their accounting system, disclosure
requirements and regulations comparing with the rest sectors of the economy (Elzahar
et al., 2015). More intriguingly, data of financial companies may be suspected to be outliers
values in any empirical research examined industries with differences in capitalization and
other firms’ characteristics (Cooper et al., 2003). After excluding the financial firms, the
initial sample comprises of all non-financial listed firms (34) on Palestine Securities
Exchange (PEX) as reported in Table 1. However, companies with missing annual reports

Figure 1.
Analytical framework

Sector No of firm %

Service 12 35.30
Industry 13 38.23 Table 1.
Investment 9 26.47 Industry
Total 34 100 classifications
EMJB and companies without complete data related to this study were also removed from the
selected sample. As a result, the final sample was reduced to 33 non-financial listed
companies. Hence, a total of 264 firm-year observations with complete data were made for
eight years.

4.2 Variable definitions

4.2.1 Dependent variable. The dependent variable in this current study is corporate cash
holdings. In this context, numerous alternative definitions of the corporate cash holdings
have been used in previous literature. Hence, to precisely measure the dependent variable
“cash holdings”, this study employs the most widely proxy used in computing the cash
holdings (e.g. Al-Najjar and Clark, 2017; Gao et al., 2013; Hassanein and Kokel, 2019). More
specifically, corporate cash holding was measured as a ratio of cash and cash equivalents to
total assets (CAH-T). Mathematically, the cash holding is computed as follows:
Cash þ Cash Equivalents
CAH
T ¼
Total Assets
4.2.2 Independent variables. To minutely determine the indecisive and unintelligible nexus
between board characteristics and corporate cash holdings, this study introduces four
independent variables which represent the most significant attributes of board of directors.
First; board size (BSIZE), this variable has been considered as the most important
characteristics of the boardroom (Anderson et al., 2004). It is broadly measured by counting
the total number of board members on the firm’s boardroom (Al-Najjar and Clark, 2017;
Boubaker et al., 2015; Hsu et al., 2015; Zaid et al., 2019; Zaid et al., 2020a; Omran et al., 2021).
Second, board independence (BIND), it was calculated as the proportion of independent
directors on the boardroom to the total number of directors (see Farinha and Borges, 2017;
Hassanein and Kokel, 2019; Kuan et al., 2012; Sheikh and Khan, 2015; Zaid et al., 2020b;
Chouaibi et al., 2021). Third, the CEO duality, this variable was measured as a dummy
variable coded one if a single person serves as CEO and board chairman at the same time; and
zero otherwise (see Boubaker et al., 2015; Gill and Shah, 2012; Lee and Lee, 2009; Issa and Zaid,
2021; Dwekat et al., 2021). Lastly, board meetings (BMET), it represents a primary factor in
measuring the board diligence (Carcello et al., 2002; Issa et al., 2021). This variable was
measured by the total number of board meetings held in a certain year (see Bathula, 2008;
Chemweno, 2016; Hassanein and Kokel, 2019).
4.2.3 Moderator variable. Faccio (2006) defines a company as politically connected (POC)
if, at least one of the firms’ top officers such as the firms’ chief executive officer (CEO) and
board of directors, or a large shareholder was an influential political member. This measure
has been vastly adopted in a stream of prior research (see Boubakri et al., 2013; Chaney et al.,
2011; Faccio, 2006; Kusnadi, 2019). Therefore, the political connection variable was measured
by a dummy variable coded one if at least one of the firms’ top officers (board members or
CEO) was an influential political party member.
4.2.4 Control variables. Beyond the explanatory variables, a set of control variables
theoretically related to corporate cash holding have been included in the study models to
minimize the probability of model misspecification. In this regard, based on a systematic
review of the earlier literature on the cash holding, we found that cash holding is influenced
by various control variables as follows: Firm size (FSIZE) is one of the most prominent firm’s
characteristics that could have a significant impact on the level of cash holdings. In this vein,
Al-Najjar (2013) argue that large companies have more flexible financial policies, which leads
these companies to hold more cash. This variable was measured as the natural logarithm of a
firm’s total assets at the end of the fiscal year. We also control for profitability (ROA). Return
on assets indicates how efficient a firm’s assets is in generating earnings. Dittmar et al. (2003)
report that profitable companies have more ability to pay their financial obligations and Board
accumulate cash. Profitability was calculated as a ratio of total income to total assets. It is also attributes and
important to control for leverage (LEV). Ferreira and Vilela (2004) contend that companies
with high levels of external debt are less likely to accumulate cash reserves. The logic in this
corporate cash
context is that leveraged firms are better monitored than companies with lower levels of debt. holdings
Leverage was measured as a ratio of total liabilities to total assets. It is essential to control for
net working capital (NWC). Opler et al. (1999) point out that net working capital can be
liquidated in the case of insufficient cash balance. Based on the previous empirical findings,
companies with better liquidity (higher NWC) are motivated to hold lower levels of cash
amounts. Net working capital was computed as a ratio of current assets (net of cash and cash
equivalents) minus current liabilities divided by total assets. We also control for firm age
(FAGE). Bates et al. (2009) indicate that older companies are well-experienced and usually
perform their operations in a better manner than young firms. Consequently, high-
performing firms require more cash to earn more profits (Saddour, 2006). Firm age was
measured as a natural logarithm of the number of years since the firm’s inception.
According to the variables above mentioned, Table 2 summarizes the acronym, expected
sign, measurement, source of data.

4.3 Model specification

To econometrically analyze the study data in a deep manner and provide solid results on the
effect of board attributes on corporate cash holdings, we empirically used a quantitative
analysis using longitudinal dataset throughout a period of eight years. Accordingly, we
applied three different approaches of static panel data: ordinary least squares (OLS), fixed
effects and random effects. Moreover, we performed the one-step system generalized method
of moments (GMM). Mathematically, the research regression equation is modeled as follows:

Expected Source of
Variable name Acronym sign Measurement data

Corporate cash CAH-T Corporate cash holding was measured as a ratio Annual
holdings of cash and cash equivalents to total assets reports
Board size BSIZE
The total number of board members Annual
reports
Board BIND
The proportion of independent directors to the Annual
independence total number of board members reports
CEO duality DUAL þ Dummy variable coded 1 if the board chairman Annual
serves as CEO at the same time;0 otherwise reports
Board meetings BMET
The total number of board meetings held during Annual
the fiscal year reports
Political POC þ Dummy variable coded 1 if at least one of the Annual
connections firms’ top officers (board members or CEO) was reports
an influential member of political party
Firm size FSIZE þ The natural logarithm of total assets Annual
reports
Profitability ROA þ The ratio of total. Income to total assets Annual
reports
Leverage LEV
The ratio of total liabilities to total assets Annual
reports
Net working NWC
The ratio of current assets (net of cash and cash Annual
capital equivalents) minus current liabilities divided by reports Table 2.
total assets Study variables
Firm age FAGE þ Natural logarithm of the number of years since Annual symbols and
the firm’s inception reports measurements
EMJB
CAH
Tit ¼ β0 þ βBCit þ βBPit þ γZit þ ηi þ νt þ εit (1)

where CAH-T is the ratio of cash and cash equivalents for firm i at time t, BC is a vector of
board characteristics variables, BP is a vector of the interaction between board
characteristics and the moderator variable “political connections”, Z is a vector of firm-
level control variables, ηi is the firm-fixed effects, νt is the time-fixed effects, i represents
individual dimension (firm), t represents time dimension (year), « represents the stochastic
error term.
According to the aforementioned discussion, a detailed econometric model can be
expressed as the following formula:
CAH
Tit ¼ β0 þ β1 BSIZEit þ β2 BINDit þ β3 DUALit þ β4 BMETit þ β5 POCit
þ β6 BSIZE 3 POCit þ β7 BIND 3 POCit þ β8 DUAL 3 POCit
þ β9 BMET 3 POCit þ β10 FSIZEit þ β11 ROAit þ β12 LEVit þ β13 NWCit
þ β14 FAGEit þ Industry Dummy þ Year Dummy þ ε (2)

where the interaction between the four dimensions of board characteristics and political
connections is outlined in Eqn (2), i.e. (BSIZE 3 POC), (BIND 3 POC), (DUAL 3 POC), and
(BMET 3 POC), (i) is a vector represents firm, (t) is a vector represents time dimension (years),
β0 is the constant and β1 to β14 are the regression coefficients, e is a vector of the stochastic
error term.
Since the board characteristics differ across industries in light of their levels, thus,
disregarding the control industry types may generate biased findings. Therefore, we
introduce industry type (Industry Dummy) to control for differences among various types of
industries and mitigate such bias. In the same context, we also control for year fixed effects
(Year Dummy) to capture any variation in the output that exists throughout time (Zaid
et al., 2020c).

5. Results and discussion

5.1 Descriptive statistics
Table 3 presents the descriptive statistics analysis for all variables included in the
econometric model. Initially, the mean value of cash holdings (CAH-T) is 5.6%, indicating
that on average, the non-financial Palestinian listed companies hold cash and cash
equivalents amount about 5.6% of their total assets. The minimum proportion of cash
holdings over total assets is 0%, and the maximum is 34%, which means that at most the
Palestinian non-financial listed companies keep about one-third of their assets in the form of
cash and cash equivalents.
Moving to the independent variables, the mean score of board size (BSIZE) is nearly nine
members. The minimum number of board of directors is four members, whereas the
maximum number is 15 members, denoting that all companies in our sample have at least
four board members. The average percentage of board independence (BIND) is 92.3%,
indicating that approximately most of the board members are non-executive directors in the
sample study. The minimum percentage of non-executives on the board is 55%, while the
maximum rate of board independence is 100%, reflecting a significant difference in the board
composition among the non-financial Palestinian listed companies. Furthermore, the average
of CEO duality (DUAL) is 14.5%, showing the compliance by most of the companies with the
Code of CG in Palestine, which suggests the separation between CEO and chairman roles.
Variables Mean Median Sd Min Max
Board
attributes and
CAH-T 0.056 0.040 0.061 0.000 0.340 corporate cash
BSIZE 8.542 8.000 2.212 4.000 15.000
BIND 0.923 1.000 0.099 0.550 1.000 holdings
DUAL 0.145 0.000 0.353 0.000 1.000
BMET 6.021 6.000 1.572 1.000 12.000
POC 0.596 1.000 0.491 0.000 1.000
FSIZE 16.781 16.705 1.533 13.500 20.740
ROA 0.017 0.020 0.087
0.620 0.360
LEV 0.324 0.310 0.192 0.010 0.780
NWC 0.096 0.070 0.176
0.320 0.530
FAGE 3.015 2.996 0.669 0.000 4.290
Note(s): This table reports the summary statistics of the study variables; CAH-T is the ratio of cash and cash
equivalents to total assets, BSIZE is the total number of members on the firm’s board of directors, BIND is the
number of non-executive directors on the board over the total number of board members, DUAL is a dummy
variable coded 1 if a single person serves as CEO and board chairman at the same time; 0 otherwise, BMET is
the total number of board meetings held in a certain year, POC is a dummy variable coded one if at least one of
the firms’ top officers (board members or CEO) was an influential member of political party, FSIZE is the
natural logarithm of a firm’s total assets at the end of the year, ROA is the ratio of total income divided by total
assets at the end of the year, LEV is the ratio of total liabilities divided by total assets at the end of the year,
NWC is the ratio of current assets (net of cash and cash equivalents) minus current liabilities divided by total
assets at the end of the year, and FAGE is the natural logarithm of the number of years passed from a firm’s Table 3.
foundation year to the measurement year Descriptive statistics

Concerning board meetings (BMET), the mean of the frequency of board meetings is around
six meetings, implying that on average, the board of directors held a meeting every two
months during the year. As shown from Table 3, the average percentage of political
connections (POC) is approximately 59.6%, implying that on average, 60% of the top officers
(board members or CEO) in the Palestinian non-financial listed companies have been at some
point of their lives as influential member of political party.

5.2 Correlation analysis

Table 4 demonstrates the correlation coefficients using the Pearson correlation test. As
demonstrated in Table 4, the correlations are significant and negative between the corporate
cash holdings measure (CAH-T) and most of the board characteristics variables including
board size (BSIZE), board independence (BIND) and board meetings (BMET) variables with
Pearson’s correlation coefficients equal to (
0.102,
0.104,
0.135) respectively. However,
the corporate cash holdings measure (CAH-T) has a significant and positive relationship with
CEO duality (DUAL) (Pearson’s correlation coefficient 5 0.143). Additionally, the Pearson
correlation coefficient is significant and positive between the corporate cash holdings
measure (CAH-T) and political connections (POC) with a Pearson’s coefficient equals
to (0.147).
The correlation matrix is critical to avoid the multicollinearity issue. As a rule of thumb,
Gujarati and Porter (2003) suggested that harmful collinearity is detected if the coefficients of
correlation between explanatory variables are above 0.8. It is obvious from Table 3 that the
highest coefficient correlation is between CEO duality (DUAL) and board independence (BIND)
(
0.67). Hence, the correlation matrix in this research reflects that all coefficients between
explanatory variables are lower than 0.80, which indicates that no multicollinearity issue is
presented among the variables included in the empirical model. In addition to the correlation
matrix analysis, the variance inflation factor (VIF) and tolerance tests were also conducted to
 EMJB

Table 4.
Correlation matrix
Variables VIF Tolerance CAH-T BSIZE BIND DUAL BMET POC FSIZE ROA LEV NWC FAGE

CAH-T 1
BSIZE 3.82 0.26
0.102* 1
BIND 4.12 0.24
0.104*
0.018 1
DUAL 4.26 0.23 0.143** 0.051
0.670*** 1
BMET 2.76 0.36
0.135**
0.016 0.018 0.013 1
POC 1.45 0.69 0.147** 0.0465 0.342***
0.269***
0.291*** 1
FSIZE 2.05 0.64 0.045 0.326***
0.230*** 0.277***
0.196*** 0.152** 1
ROA 2.05 0.49 0.311*** 0.024
0.084 0.063
0.046 0.175*** 0.238*** 1
LEV 1.90 0.53
0.069 0.181*** 0.068 0.165*** 0.189*** 0.033 0.184***
0.273*** 1
NWC 1.60 0.63
0.106*
0.126**
0.101* 0.003 0.037
0.000
0.06 0.382***
0.438*** 1
FAGE 2.33 0.43 0.037
0.058
0.290*** 0.396*** 0.005
0.175**
0.074 0.392***
0.127** 0.199*** 1
Note(s): *, ** and *** correlation statistically significant at the 0.10, 0.05 and 0.01 levels, respectively
check the multicollinearity assumption. In general, as stated by Field (2013), there is no Board
multicollinearity concern if explanatory variables meet the following two conditions: the VIF attributes and
should be below 10 and tolerance should be above 0.1. Table 4 shows the results of the VIF and
tolerance tests after implementing the mean-centering method. As reported in the table, the
corporate cash
highest value of VIF is (4.26) for CEO duality (DUAL), and the smallest value of VIF is (1.45) for holdings
political connections (POC). In the same way, the tolerance factors ranged from a low of (0.23)
for CEO duality (DUAL) to a high of (0.69) for political connections (POC). Thus, the results of
both tests indicate that no severe multicollinearity problem occurs even after including the
interaction of the moderator variable in the study model specification.

5.3 Multiple regression findings

Table 5 provides the empirical results using the multiple regression analysis. A panel data or
longitudinal data analysis was conducted since the combination of both time-series data and
cross-sectional data is better than using only one of these two dimensions (Gujarati, 2009).
More distinctly, the panel data can provide a comprehensive view of the phenomenon under
investigation. In this context, several static panel data models were performed; pooled OLS,
fixed-effects model (FEM) and random-effects model (REM). Afterwards, in order to identify
the optimal or the most appropriate regression model, several tests have been applied.
According to the results presented in Table 5, the incremental F-test has a significant p-value
at 0.01 significance level, implying that the FEM is more suitable than pooled OLS. Next, the
Breusch–Pagan Lagrange multiplier (LM) test also provides a significant p-value at 0.01,
denoting that the REM is more appropriate than pooled OLS. Finally, the Hausman test was
conducted to identify which model is the best between fixed-effects and random-effects. The
results report a significant p-value at 0.01, reflecting that the REM should be rejected and the
FEM is accepted and considered the optimal model in this study. Consequently, the findings
of the FEM were taken into consideration for further discussion below.
In general, the adjusted R-squared in the direct model is 24.18%. This percentage reflects
that the explanatory variables of this study can explain approximately 24% of the variations
in the corporate cash holdings. More importantly, the adjusted R-squared after including the
moderator variable is 27.65%. This percentage indicates that with the presence of political
connections, the right hand of the indirect model can explain around 28% of the variations in
the firm’s cash holdings.
It is worth mentioning that the results concerning board characteristics in the direct
relationship are according to the agency theory and our study hypotheses. In this context,
board size (BSIZE) is significantly and negatively associated with corporate cash holdings
(CAH-T) (β 5
0.004; p < 0.05). This result implies that larger boards of directors are more
inclined to maintain lower levels of cash amounts. The logic behind this finding is that large
boards are characterized by greater depth of intelligence and awareness, which improve the
quality of strategic decisions (Jackling and Johl, 2009). This result is consistent with a study
conducted in developed countries, more specifically, in MENA countries (Al-Najjar and Clark,
2017). The findings also indicate a negative and significant coefficient of board independence
(BIND) with the levels of corporate cash holdings (CAH-T) (β 5
0.097; p < 0.10). This finding
suggests that the quantity of cash holdings diminishes with a high percentage of non-executive
directors on the board. Consequently, this study supports the notion that non-executive
directors are more hard-working in restricting the freedom of managers, and thereby, those
independent directors are effective with respect to the management of corporate cash holdings.
This outcome is in alignment with (Boubaker et al., 2015; Kusnadi, 2011).
Conversely, the findings show that CEO duality (DUAL) has a positive and significant
coefficient with corporate cash holdings (CAH-T) (β 5 0.060; p < 0.01). This finding means
that the level of cash holdings is higher when the duality of roles occurs. Having a company
EMJB Direct relationship Indirect relationship
Variables Coefficients Standard error Coefficients Standard error

Main effects
BSIZE
0.004** (0.002)
0.006** (0.003)
BIND
0.097* (0.054)
0.083* (0.045)
DUAL 0.060*** (0.022) 0.039** (0.018)
BMET
0.025*** (0.008)
0.008** (0.004)
POC 0.039*** (0.014)

Moderated effects
BSIZE 3 POC 0.999*** (0.046)
BIND 3 POC 0.273*** (0.079)
DUAL 3 POC 0.108*** (0.026)
BMET 3 POC 0.298*** (0.109)

Control variables
FSIZE 0.023*** (0.003) 0.005* (0.003)
ROA 0.351*** (0.053) 0.283*** (0.055)
LEV
0.079*** (0.025)
0.108*** (0.025)
NWC
0.065*** (0.023)
0.037 (0.025)
FAGE 0.031*** (0.010) 0.021** (0.009)
Constant 0.323*** (0.087) 0.129** (0.063)
Observations 264 264
Standard errors Clustered Clustered
Adj R-squared 0.2418 0.2765
Incremental F-test 9.74***
Breusch–Pagan (LM) test 68.18***
Hausman test 55.85***
Note(s): BSIZE is the total number of board members on the firm’s board of directors, BIND is the number of
non-executive directors on the board over the total number of board members, DUAL is a dummy variable
coded 1 if a single person serves as CEO and board chairman at the same time; 0 otherwise, BMET is the total
number of board meetings held in a certain year, POC is a dummy variable coded one if at least one of the firms’
top officers (board members or CEO) was an influential member of political party, FSIZE is the natural
logarithm of a firm’s total assets at the end of the year, ROA is the ratio of total income divided by total assets at
the end of the year, LEV is the ratio of total liabilities divided by total assets at the end of the year, NWC is the
ratio of current assets (net of cash and cash equivalents) minus current liabilities divided by total assets at the
end of the year, and FAGE is the natural logarithm of the number of years passed from a firm’s foundation year
Table 5. to the measurement year. The table presents the findings after controlling for time-fixed effects and industry-
Multiple regression fixed effects. Moreover, the standard errors are double clustered by (firms and years) to adjust for arbitrary
results using the fixed- heteroscedasticity and serial correlation. The standard errors are reported in parentheses. Superscripts *, **
effects model (FEM) and *** means statistically significant relationship at the 0.10, 0.05, 0.01 levels, respectively

with the same person to perform both CEO and Chairman duties leads to less efficiency in the
company’s management. Therefore, Palestinian companies with CEO duality try to maintain
high levels of cash amounts to be more independent in making financial decisions. This
finding is in conformity with a large number of previous studies (Boubaker et al., 2015; Gill
and Shah, 2012; Nhan, 2018). Moreover, the results reveal a significant and negative
relationship between board meetings (BMET) and firm’s cash holdings (CAH-T)
(β 5
0.025; p < 0.01). This result indicates that active boards lead to lower levels of a
firm’s cash holdings. Moreover, the agency theory and the Palestinian code of CG propose
that the frequency of board meetings increases the effectiveness of board supervision, which
in turn diminishes the cash levels maintained by companies. This result is consistent with the
findings of (Hassanein and Kokel, 2019; Hsu et al., 2015).
 Concerning the indirect relationship, at first glance, it can be observed from Table 5 that Board
the political connections variable (POC) is positively and significantly related to corporate attributes and
cash holdings (β 5 0.039; p < 0.01). Furthermore, the table displayed the results of the FEM
regression for the interactions of board characteristics variables with political connections.
corporate cash
Interestingly, the interaction between board size and political connections (BSIZE 3 POC) holdings
reports a positive coefficient (β 5 0.999; p < 0.01). From this perspective, the presence of
political connections has been able to modify the original direction from negative to a positive
association. Similar to the case of board size, the impact of board independence moves from
negative to a positive relationship on corporate cash holdings as a result of the moderating
effect of political connections (BIND 3 POC) (β 5 0.273; p < 0.01).
Moving to the third board characteristic, the interaction between CEO duality and political
connections (CEO 3 POC) has an even more significant positive coefficient with the firm’s
cash holdings (CAH-T) (β 5 0.108; p < 0.01). More clearly, the influence of CEO duality shifted
to be more significant under the presence of political connections. Further, as it was predicted,
the empirical results report that the presence of political connections modifies the direction
from negative to positive relationship between board meetings and the level of cash holdings
(BMET 3 POC) (β 5 0.298; p < 0.01). The reason behind these findings is that, from an
agency framework perspective, politically connected companies are more likely to
accumulate higher levels of cash amounts (Boubakri et al., 2013). More clearly, due to the
ease of extracting liquid assets, the entrenched managers tend to keep large amounts of cash
to fulfill their political objectives, which in turn impact the company’s financing policies
(Caprio et al., 2013; You and Du, 2012).
Given the aforementioned empirical results, the interaction between board attribute and
political connections cast the light on the evidence relating to the patterns and paths that the
presence of political connections can create in the business environment. More minutely, it is
not surprising that proximity to political power can change the direction of several
phenomena. In this vein, we can conclude that it seems normal that the direction of the nexus
between board attributes and corporate cash holdings may change under the presence of
political connections.
Besides board characteristics, this study also takes into account five control variables to
investigate the determinants of corporate cash holdings. In this regard, a significant positive
association was found between firm size (FSIZE) and the firm’s cash holdings (CAH-T). This
result is consistent with the findings of (Al-Najjar, 2013). Likewise, a significant positive
relationship was reported between profitability (ROA) and corporate cash holdings (CAH-T).
This finding is in alignment with the outcomes of (Mun and Jang, 2015). Additionally, the
regression results plainly reveal that a significant negative association existed between
leverage (LEV) and the level of firm’s cash holdings (CAH-T). The result conforms with the
findings of (Subramaniam et al., 2011). The net working capital (NWC) also yields a
significant negative relationship with corporate cash holdings (CAH-T). This outcome is
consistent with the results of (Bigelli and Sanchez-Vidal, 2012). With respect to the last control
variable, a significant positive association was represented between firm age (FAGE) and the
level of corporate cash holdings (CAH-T). This finding is in line with the empirical finding of
(Gao et al., 2013).

5.4 Robustness checks

It is well documented in theoretical and empirical studies that endogeneity problem is a
severe issue in corporate finance field. In this context, several tests have been applied to select
the most appropriate model. More specifically, we start with a baseline estimation using a
pooled OLS model. Afterwards, we performed a FEM and random effect (RE). The findings
denote that the FEM is the optimal estimator. However, FE partly eliminates the endogeneity
issue (Wooldridge, 2010). In this regard, FE may generate inconsistent and biased findings.
EMJB Hence, we re-examine the study relationships by using dynamic panel data model called the
GMM estimator to control for the endogeneity dilemma. The GMM estimator was developed
by Arellano and Bond (1991) and Blundell and Bond (1998) for dealing with endogeneity and
provide robust findings. According to Ullah et al. (2018), one-step GMM estimator is more
better to control for different sources of endogeneity, namely, dynamic endogeneity,
simultaneity and unobserved heterogeneity. Furthermore, one-step GMM model with robust
standard errors is highly preferred under the case of small sample size to provide solid
outcomes.
From an econometrics framework, ignoring the dynamic CG–corporate cash holdings
nexus will generate biased findings. Under such circumstances, the instrumental variables
method is required. Notwithstanding, finding valid instruments “ exogenous instruments”
are essentially difficult in fact (Himmelberg et al., 1999). Given the unavailability of suitable
“external” instruments in the context of CG–cash holding literature, the system GMM
panel specification is considered to be an optimal solution in responding to the
endogeneity issue.
Given the aforesaid discussion, the dynamic GMM will be superior by including lagged
values of the past period of the dependent in the right-hand side of the econometric model. As
a consequence, one-period lag of the corporate cash holdings is a suitable candidate to control
for different types of endogeneity. A detailed specification for the one-year-lagged model can
be expressed as the following formula:
CAH
Tit ¼ β0 þ β1 CAH
Ti ðt
1Þ þ β2 BSIZEit þ β3 BINDit þ β4 DUALit þ β5 BMETit
þ β6 POCit þ β7 BSIZE 3 POCit þ β8 BIND 3 POCit þ β9 DUAL 3 POCit
X
þ β10 BMET 3 POCit þ Control variablesþIndustry Dummy
þ Year Dummy þ ε
(3)

Table 6 presents the one-step system GMM coefficient estimates and p-values of specific tests.
As shown in the table below, the empirical findings of the GMM model are similar to the main
results under FE. Fascinatingly, the GMM results reveal that all interactions between board
attributes variables and the moderator variable have the same influence on the firm’s cash
holdings. Therefore, the regression results using the one-step system GMM are robust and
similar to the FE findings.
Moreover, the study regression model was replicated using one-year lagged values for all
independent variables to alleviate the destructive and pernicious influence of any potential
endogeneity risk. Interestingly, the outcomes of lagged regression models (Table 6) are
compatible with the FE result reported in Table 5.

6. Conclusion
The importance of interrelation between CG and corporate cash holdings has witnessed an
increased amount of attention over the last few years. Therefore, this current research
empirically and deeply investigates the influence of board attributes on the level of corporate
cash holdings. In the strictest sense of the word, this study made a distinction between direct
and indirect approaches in examining the nexus between the aforesaid nexus. Accordingly,
this empirical study well-respond to the more recent calls presented by ancestors for doing
further indirect investigations to gain a holistic understanding and offers new perspectives
for different parties of stakeholders about the vague association between board attributes
and corporate cash holdings.
 GMM model Lagged IV
Board
Variables Coefficients Standard error Coefficients Standard error attributes and
corporate cash
Main effects
CAH-T (t-1) 0.472*** (0.066) 0.531*** (0.044) holdings
BSIZE
0.035** (0.017)
0.067** (0.027)
BIND
0.094** (0.037)
0.073* (0.039)
DUAL 0.210** (0.097) 0.249** (0.115)
BMET
0.047* (0.025)
0.075*** (0.019)
POC 0.086*** (0.024) 0.094** (0.036)
Moderated effects
BSIZE 3 POC 0.683*** (0.183) 0.699*** (0.234)
BIND 3 POC 0.868*** (0.244) 0.883** (0.409)
DUAL 3 POC 0.232** (0.096) 0.266*** (0.071)
BMET 3 POC 0.419*** (0.068) 0.353** (0.132)
Control variables
FSIZE 0.030* (0.018) 0.054** (0.022)
ROA 0.195** (0.082) 0.231 (0.149)
LEV
0.214*** (0.073)
0.248*** (0.084)
NWC
0.310*** (0.070)
0.292*** (0.075)
FAGE 0.038*** (0.010) 0.055** (0.021)
Constant 0.498* (0.294) 0.523* (0.305)
Year dummy Yes Yes
Industry dummy Yes Yes
Number of observations 264 264
Standard errors Clustered Clustered
Number of groups 33
Arellano–Bond test for AR (2) (p-value) 0.473
Hansen test of over identification (p-value) 0.291
Note(s): This table reports the results of one-step system GMM model and lagged model: CAH-Ti (t
1) is the
one-year lagged value of the corporate cash holdings measured by the ratio of cash and cash equivalents to total
assets. The table presents the findings after controlling for time-fixed effects and industry-fixed effects. Lagged Table 6.
model is the model with lagged all explanatory variables. The standard errors are reported in parentheses. Robustness test using
Superscripts *, ** and *** statistically significant at 0.10, 0.05 and 0.01 levels, respectively one-step system GMM

According to the research analysis, the empirical results are consistent with entrenched
assumptions under agency theory ideology. After controlling for several firm-specific
variables and endogeneity issue, robust findings based on one-step system GMM estimator
indicate that board attributes play a vital role in determining the level of corporate cash
holdings. In light of this, a conclusion can be drawn that the effectiveness of boardroom can
effectively minify free cash flow in management’s hands, which, in turn, influence the extent
of cash holdings.
More intriguingly, the empirical findings reveal that the effects of board size, board
independence and board meeting turn from negative significant to positive significant.
Further, the presence of political connections strengthens the positive impact of CEO
duality on corporate cash holdings. Accordingly, the level of political connections has a
sensitive influence on strategic decisions, directly and indirectly, denoting that the effect of
board attributes on corporate cash decisions is influenced by the presence of political
connections.
Considering the aforementioned, our results are ideally matched with the study objectives.
More minutely, our results opened the black box regarding the nexus between board attributes
“board size, board independence, CEO duality, and board meeting” and corporate cash holdings
EMJB by exploring the moderating effect of political connections. Accordingly, this empirical research
helps in narrow the ongoing debate in the existing CG–cash holdings literature.
From a practical perspective, we drive significant implications to CG and cash holdings
literature, which are substantial to different parties of stakeholders, namely, policymakers,
government, firms. First, our results provide practical implications because they propose that
the effectiveness of boardroom may be insufficient in supporting the superior cash strategies
under the presence of high level of political connections in some contexts. As a consequence,
regulators and firms should take the serious effect of political connections into consideration
and update the policies accordingly. More plainly, policymakers have the responsibility in
ameliorating the role of the board of directors in determining the firm’s cash policies. Hence,
proper and solid governance policies could be useful to protect the firm’s liquid assets such
cash from the opportunistic behavior of managers.
Although we attempt in this study to provide a multifaceted view of the link between
board attributes and corporate cash holdings, we acknowledge that our empirical research
has a few limitations and the findings should be interpreted cautiously. One of the most
critical limitations experienced throughout this research is that the underlying assumptions
of the moderating effect of political connections on board attribute–corporate cash holdings
literature have not yet examined by ancestors. Second, the study sample is limited to the
Palestinian non-financial listed companies. Accordingly, the generalization of the results
might be restrained to the firms working in similar socioeconomic status.
Finally, this research can serve as a basis for future investigations pertaining to CG–
cash holding area, particularly in developing countries. More concisely, this study
encourages the researchers for further future studies to examine theoretically other
significant moderators.

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Further reading
Roodman, D. (2009), “How to do xtabond2: an introduction to difference and system GMM in Stata”,
The Stata Journal, Vol. 9 No. 1, pp. 86-136.

About the authors

Sara T.F. Abuhijleh: She is a lecturer at Palestine Technical University – Kadoorie, Palestine. Also, she is
a CMA – Certified Management Accountant. Her main areas of expertise are corporate governance,
financing policies and business sustainability. Sara has published many research in highly ranked such
as Journal of Cleaner Production, Corporate Social Responsibility and Environmental Management,
Corporate Governance: The international journal of business in society, Journal of Global Responsibility.
EMJB Mohammad A.A. Zaid: He is an Assistant Professor of Accounting at Palestine Technical University –
Kadoorie, Palestine. He received the PhD degree from Dongbei University of Finance and Economics,
Dalian, China. His research interests are mainly in the areas of corporate governance, corporate disclosure,
IFRS and corporate social responsibility. Zaid has published many research in highly-ranked and top-tier
journals such as Journal of Cleaner Production, Corporate Social Responsibility and Environmental
Management, Corporate Governance: The international journal of business in society, Meditari
Accountancy Research, EuroMed Journal of Business, International Journal of Accounting and
Information Management, and Journal of Global Responsibility. In addition, Zaid has been working as
a reviewer for international accounting journals, which are published by Elsevier and Emerald.
Mohammad A.A. Zaid is the corresponding author and can be contacted at: Mohammad.zaid@ptuk.edu.ps

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