Corporate Governance and Cash Holdings Decisions by U.S. Life Insurance Companies

In the context of the principal-agent framework, this article examines the impact of corporate governance on U.S. life insurers’ cash holdings. A dynamic panel model estimates the factors that affect cash holdings. In the second stage, regression models estimate and test the influence of corporate governance variables on the adjustment speed toward target cash holdings. It is found that proxies for corporate governance such as board size and member independence are significant factors explaining the cash holdings decision and are effective in mitigating the principal-agent conflict. Furthermore, the adjustment rate to target cash holdings is estimated. The analysis shows that the adjustment rate varies across U.S. life insurance companies with the corporate governance proxies used. Finally, this study confirms the importance of other control variables used in prior insurance studies analyzing the cash holdings decision.