International Corporate Governance and Corporate Cash Holdings

TLDR

Agency problems are a key determinant of corporate cash holdings. In countries with weak shareholder protection, firms hold up to twice as much cash, and typical drivers such as investment opportunities and asymmetric information are less influential—especially when capital markets are developed and fund access is easier—suggesting investors cannot compel managers to reduce excess cash.

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.