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International Corporate Governance and Corporate Cash Holdings

Published online by Cambridge University Press:  06 April 2009

Amy Dittmar ,
Jan Mahrt-Smith  and
Henri Servaes
Amy Dittmar
Affiliation:
[email protected], Kelley School of Business, Indiana University, 1309 East 10th Street, Bloomington, IN 47405;
Jan Mahrt-Smith
Affiliation:
[email protected], University of Toronto, Rotman School of Management, 105 St. George Street, Toronto, Ontario, M5S 3E6, Canada;
Henri Servaes
Affiliation:
[email protected], London Business School, Sussex Place, Regent's Park, London NW1 4SA, Great Britain.
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Abstract

Agency problems are an important determinant of corporate cash holdings. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for cash holdings, such as investment opportunities and asymmetric information, actually become less important. These results are stronger after controlling for capital market development. Indeed, consistent with the importance of agency costs, we find that firms hold larger cash balances when access to funds is easier. Our evidence is consistent with the conjecture that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 1 , March 2003 , pp. 111 - 133
Copyright
Copyright © School of Business Administration, University of Washington 2003

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