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The underlying mechanisms of the relationships between corporate financial policies and firm value: flexibility and agency theory perspectives

The underlying mechanisms of the relationships between corporate financial policies and firm... This paper aims to discover the underlying mechanisms by which corporate financial policies, cash holdings, capital structure and dividend payouts, transmit their effects on firm value in the “Middle East and North Africa” (MENA) emerging markets.Design/methodology/approachThe authors employ a novel integration of path modelling with parallel multiple mediation analysis to empirically test the hypothesised indirect effects through the mechanisms represented by the value of financial flexibility (VOFF) and agency costs.FindingsThe authors do not find any evidence of the association between cash holdings, dividend payouts, and firm value when the mechanisms through the VOFF and agency costs are considered. While these two forces, i.e. the VOFF and agency costs, have balanced mediation effects on the relationship between cash holdings and firm value, they represent equivalent and complementary mechanisms by which dividend payouts transmit their positive impact on firm value. Moreover, we document a significant negative partial mediation effect of agency costs on the relationship between leverage and firm value; however, we do not find any evidence supporting the mediation effect of the VOFF on such a relationship.Originality/valueThis paper sheds new light on the forces that govern the nature of the relationships between corporate financial policies and firm value. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Business Administration Emerald Publishing

The underlying mechanisms of the relationships between corporate financial policies and firm value: flexibility and agency theory perspectives

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References (122)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1757-4323
DOI
10.1108/apjba-08-2021-0420
Publisher site
See Article on Publisher Site

Abstract

This paper aims to discover the underlying mechanisms by which corporate financial policies, cash holdings, capital structure and dividend payouts, transmit their effects on firm value in the “Middle East and North Africa” (MENA) emerging markets.Design/methodology/approachThe authors employ a novel integration of path modelling with parallel multiple mediation analysis to empirically test the hypothesised indirect effects through the mechanisms represented by the value of financial flexibility (VOFF) and agency costs.FindingsThe authors do not find any evidence of the association between cash holdings, dividend payouts, and firm value when the mechanisms through the VOFF and agency costs are considered. While these two forces, i.e. the VOFF and agency costs, have balanced mediation effects on the relationship between cash holdings and firm value, they represent equivalent and complementary mechanisms by which dividend payouts transmit their positive impact on firm value. Moreover, we document a significant negative partial mediation effect of agency costs on the relationship between leverage and firm value; however, we do not find any evidence supporting the mediation effect of the VOFF on such a relationship.Originality/valueThis paper sheds new light on the forces that govern the nature of the relationships between corporate financial policies and firm value.

Journal

Asia-Pacific Journal of Business Administration – Emerald Publishing

Published: May 11, 2023

Keywords: Cash holdings; Capital structure; Payout policy; Financial flexibility; Agency costs; Firm value

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