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The determinants of corporate cash management policies: Evidence from around the world

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  • Kusnadi, Yuanto
  • Wei, K.C. John
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    Abstract

    We examine the determinants of corporate cash management policies across a broad sample of international firms. We document that firms in countries with strong legal protection of minority investors are more likely to decrease their cash holdings in response to an increase in cash flow than are firms in countries with weak legal protection. This relationship is most pronounced for firms that are financially constrained and those with high hedging needs. More importantly, we do not find evidence that financial development plays an incremental impact on the cash flow sensitivity of cash, after controlling for the effect of legal protection. Therefore, we argue that the legal protection of investors (rather than financial development) represents the first-order effect in influencing international firms' cash management policies. The results are robust to alternative specifications. In general, our findings reinforce the importance of country-level legal protection of investors in mitigating the effects of firm-level financial constraints and hedging needs on corporate cash management policies.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 17 (2011)
    Issue (Month): 3 (June)
    Pages: 725-740

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    Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:725-740

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    Web page: http://www.elsevier.com/locate/jcorpfin

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    Keywords: Legal protection Financial constraints Hedging needs Cash management policy;

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    Cited by:
    1. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    2. Xiao, Gang, 2013. "Legal shareholder protection and corporate R&D investment," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 240-266.
    3. Kusnadi, Yuanto, 2011. "Do corporate governance mechanisms matter for cash holdings and firm value?," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 554-570, November.
    4. Lin, Chen & Lin, Ping & Zou, Hong, 2012. "Does property rights protection affect corporate risk management strategy? Intra- and cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 311-330.
    5. Rashid Ameer, 2012. "Impact of cash holdings and ownership concentration on firm valuation: Empirical evidence from Australia," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(4), pages 448-467.
    6. Bruce Seifert & Olubunmi Faleye & Halit Gonenc, 2012. "Creditor Rights, Country Governance, and Corporate Cash Holdings," Koç University-TUSIAD Economic Research Forum Working Papers 1214, Koc University-TUSIAD Economic Research Forum.
    7. Ferrando, Annalisa & Marchica, Maria-Teresa & Mura, Roberto, 2014. "Financial flexibility across the euro area and the UK," Working Paper Series 1630, European Central Bank.
    8. Kirch, Guilherme & Terra, Paulo Renato Soares, 2012. "Determinants of corporate debt maturity in South America: Do institutional quality and financial development matter?," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 980-993.

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