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Country-level corporate governance and lines of credit

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  • Mollagholamali, Mohsen
  • Rao, Ramesh

Abstract

Agency problems related to country-level investor protection are important determinants of corporate liquidity management. This paper extends the work of Dittmar, Mahrt-Smith, and Servaes (2003) on country-level governance effects on corporate liquidity but with a focus on line of credit. Since both line of credit and cash constitute integral elements of a company's liquidity policy, a complete understanding of how country-level governance affects liquidity management requires that we also examine its impact on firm-level utilization of line of credit. Using a large sample of international firms from 44 countries, we find that in economies where investor protection is strong, the likelihood and the magnitude of line of credit obtained is higher. We also show that the substitutability of the line of credit and cash holding is stronger in these countries. Our study implies that minority owners in countries with strong investor protection can force corporate managers to disgorge cash and increase their reliance on monitored liquidity through line of credit.

Suggested Citation

  • Mollagholamali, Mohsen & Rao, Ramesh, 2022. "Country-level corporate governance and lines of credit," Finance Research Letters, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:finlet:v:45:y:2022:i:c:s1544612321002385
    DOI: 10.1016/j.frl.2021.102159
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    More about this item

    Keywords

    Liquidity management; Line of credit; Cash holding; Corporate governance;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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